London Business School Case Book 36 London Business School Case Book

52 London Business School Case Book 36 London Business School Case Book

BCG Bain & Company Iceberg 36 London Business School Case Book Entertainment Co PROFIT Bain & Company London Business School Case Book 39

Bain & CompanyEntertainment Co PROFIT Exhibit: UK ice cream tub prices (show to candidate) Entertainment Co Case Summary for Interviewee Exhibit 3 – Most recent performance results from 3 selected tour stops Market price architecture ExampleSituation products Case Summary for Interviewee• PremierCity A touring live entertainmentCity B companyCity C Average ticket price: $100 $80 $90 • Company has enjoyed fiLondon ve Business years School Case of Book tremendous85 growth in ticket sales and revenue Total shows:Situation 85 45 75 Total attendance: McKinsey & Company 210,000 75,000 180,000 • Premier touringOldPharma live entertainment company Occupancy rate: Complication95% 64% 92% 7.00 -7.99 Variable• costsCompany per show: has enjoyed fi ve years$60K of tremendous growth$50K in ticket sales and revenue$60K London Business School Case Book 57 Fixed costs Question 2 • While$8M ticket sales and $4Mrevenues have continued$6.5M to grow steadily, profi tability growth has lagged

Complication The team wants to explore BioFuture’s current drug pipeline. The team decides to focus fi rst on evaluating the value of 6.00-6.99 # of stops in previous 5 years:BioFuture’s drug pipelineHaagen – both its current Dazs portfolio,5 as well as its ability to generate drugs2 on an ongoing basis. What 3 • While ticket salesissues should and the teamrevenues consider when have evaluating continued the value of BioFuture’s to growexisting drug steadily, pipeline? profi tability growth has lagged BCG Year of fi rst visit: BenKey & questionJerrys2001 2008 2006 5.00-5.99 Ensure to mention different• issuesWhat instead ofis immediately the rootdiving very cause deep into one issue.of theThen ask client’s your interviewer iflagging profi tability? Key question he/she wants toTesco go deeper on any Finest of them. Cupid’s Arrow • What is the root cause of the client’s lagging profi tability? 4.50-4.99 A good answer would include the • Costs to manufacture and sell, e.g., • Side effects and potential legal Case structure – Step 3following: marketing, distribution, etc. exposure, e.g., potential law suits Further cost of R&D until each drug due to unexpected side effects London Business School Case Book 91 is ready to be sold. Please• followPress about thesethe drugs, steps e.g., have below to guide you through the case. McKinsey & Company famous doctors called for this kind • Emergence of substitutes – are Please followRefreshNow! Soda the steps below to guide you through the case. 4.00-4.49 Structure Potential value of selling each drug. Analyseof drug, is it only slightly improving competitors working on substitutesAdvise • Market size, e.g., size of patient on what is on the market already? already? Is it about speed and Question 2 population, pricing does BioFuture have enough After reviewing the key factors RefreshNow! should consider in deciding whether to launch O-Natura, your team wants to Frame the understandUse the beverageframework market and consumer topreferences toDig gauge potential deeper success of O-Natura. Develop insights Synthesiseresearchers what working Make on the a 3.50-3.99 The bottled market splits• into non-sparkling,Market sparkling,share, and e.g., imports. number Flavored water offalls within non-sparkling.A veryYour team good answer would also respective drugs? problem has gatheredguide the following analysis information on the U.S. bottled water market. The information shows an estimate for the share of you learned recommendation fl avored water, as well as the currentcompetitive share for the two drugsmain products: in CoolR&D and O2Flavor.or on include the following: Case structurethe – market; Step different 1 sideCase effects, structureRisk level – Step• 1Strength of underlying patents, i.e., Exhibit 1 convenient dosing schedule (i.e., Fictitious• Likelihood exhibit clinical trials of a drug how likely is it that a competitor U.S. Bottled water market patients are prescribed to take a will prove effective can successfully copy BioFuture’s 3.00-3.49 Millions of gallons drugNon-sparkling at regular intervalsFlavoured that (by product)are drug? 100% = 8,000 London Business School Case Book 79 Exhibit: Historic and projected growth ofeasy to rememberthe such UKas once a London online •Business Likelihood School Case drug Book will win109 datingregulatory market Cool 20% Marakon day or every 12 hours), etc. approval Roland Berger Strategy Consultants AirJetStructure Inc. Non-Flavoured 95% 5% Flavoured 10% 02Flavour Analyse Advise 2.50-2.99 Private Jet Co (PJC) – Fleet Renewal Iceberg 1L Vanilla €2.82 70% Structure Analyse Advise (show to candidate if this data is requested) Other Question 3 Creative Problem Solving for Case Interviews Using a typical profi tability framework, the candidate should make the following observations Frame theBased on the target priceBelow and upfront is a• UsedescriptionIn order to launch framework O-Natura of expected, • The probability VP of Operations to estimates of success, Dig bydeeper stage, in the Pharma R&D pipeline.Develop insights Synthesise what Make a

Retail price segment €/L StepThe Interview 1: Identify Process thefi xed evaluation costs, what share structure of the fl avored RefreshNow! would need to incur that each bottle would cost $1.90 non-sparkling bottled water would $40 million Tescoas total fi xed costs, to1L produce and deliverVanilla in the newly €2.22 2.00-2.49 • The Jet Engine business is • The problem lies with the Jet • Jet engine parts are complex and A simple evaluation modelO-Natura can need be to captureused in orderThe to key differentiatorincluding marketing here expenses is as establishedcriteria process. including cost, safety, prestige, problemunprofi table while the propeller Engineguide business analysisFrametypically the bought from specialized Use framework to Dig youdeeper learned Developrecommendation insights Synthesise what Make a to generate three NPV breakcases. even? The Here iskey some additionalrecognising well that as increased there costs is a across third way – comfort and the latest facilities (e.g. business isinformation highly profi for youtable to consider as you the production and distribution OEMs form your response: Note: “Filing”network is the process of submitting all of the clinical and safety evidence from Phase I, II, and III trials, and asking point here• is toGross fi rst margins create in a thebaseline Jet Engine refurbishment.CaseAdditional information This is hinted at in theBook being able to connect phones and case in which the cash• fl owO-Natura of a would do- launch in a question16 oz. and will be made available laptops while in fl ight). business are muchpresentation lower (1/8 than of a gallon)thefor with regulatory •a Costs and approval hence margins problemto are actually in sell the drug. guide analysis you learned recommendation Propeller businessprice of $2.00 to retailers line with market average nothing approach is calculated. Once in Athe Practical information Guide above on How should to Crack the Case Interviews 1.50-1.99 this has been achieved, the same candidate ask the right questions. The CAGR 300 calculations can be re-run• Ask for for the clarifi other cation of informationaircraft if necessary age is a key driver of costs but Step 3: Analyze the Jet Engine RegionalHow Aircraft can Business you dig deeper to fi nd the source of the problem? investment scenarios. • Take notes of the numbersthe customer is driven by a range of ExhibitDo you 1 have a hypothesis about what is causing the problem? Fictitious exhibit • Take time to plan out how to approach the calculation ’12-’14 278 The candidate should focus the rest of the discussion on the Jet Engines business and understanding market size, growth and profi• tabilityDescribe withinyour approach the segment. and talk the Provide interviewer the through following your calculation. information The more(in full you or talk as the requested) easier it will be for 1.00-1.49 your interviewer to helpExpected you probability of success, by stage of research and development Percent Other (~ 20 players <£2m) 1 Baseline (Do-Nothing) 2 Re-New Fleet 3 Refurbish Fleet +36% Market Structure and Economics Tesco Val. 2L Vanilla €0.78 250 Overall Market Economics 0.00-0.99 Calculate revenue from declining 2011, $mCalculate revenue which will hold fi rm as Calculate revenue which will hold fi rm Table4Two utilisation as customers choose customers continue to use PJC’s newer as customers continue to use PJC’s Total US Market Size 3,520 competitors’ planes’ over PJC planes 70%newer planes (cabin not aircraft40% is 50% 90% Successful Average Costs per Aircraft $6.8 Phase I Phase II Phase III Hints Candidate drugs important) Filing marketing Calculate variable# of Jets costs Sold driven by cost 440Calculate variable costs which willtrial trial trial and sales Exhibitper 1: Block Interviewee Hour,Total which Capital will Invested increase should over 3,300 immediatelyremain stable due to lower recognise maintenance disparityCalculate variable in growthcosts driven of revenues and profi t. TakeAChance the time due to aircraft age and fuel costs on newer planes by cost per Block Hour, which will Cost of Capital 10% increase over time due to aircraft age 50% 10% ExhibitCalculate 2: Interviewee cash fl ow which will be should the pointCalculate out cash fl thatow driven the by investment unprofi30% table shows60% have shorter LOR and occupancy rates. CAGR same as grossMarket margin Structure due to absence of in replacement fl eets Calculate cash fl ow driven by 204 0 5 10 15 20 25 30 capital35 investment 40 Failinvestment in re-furbishing fl eets Fail Fail Fail 200 500 TakeMeOut 440 deliveries ’08 – ’11 CAGR ’09-’12 400 Competitor 4: 70 360 deliveries Competitor 4 6% Market value of price segment at retail price 2012 (€m) Competitor 3: 70 300 Competitor 4: 58 Competitor 3 1% MatchMeUp Competitor 2: 92 Competitor 2 15% +19%Step 2: Evaluate each investmentCompetitor 3: 68 option 200 Competitor 1 7%

# of Deliveries Competitor 2: 61 The second thing to get right is the structure of the calculationCompetitor 1: itself. 97 The importantAirJet thing Inc. here is to concentrate15% on answering the question100 and Competitoravoid getting 1: 79 trapped in the detail or going off on tangents.Total Market: A tree structure will Howhelp7% and, would you frame the problem? AirJet Inc.: 110 indeed, shows the interviewerAirJet that Inc.: you 72 understand the big picture. 150 Lovebirds 150 0 Iceberg ice cream tubs Other company ice cream tubs 2008 2011 133 Price per BH30> USD 3,000 per BH HappyHearts

30 > 3,000 hours pa., dropping to Revenue Utilisation5 (BH) 1,500 hours p.a. after 5 yrs How would you frame the problem? Source: Nielsen: Store research; BCG analysis 99 for10 old a/c UK revenue (£m) 100 Cash Flow 10 > USD 1,500 per BH, rising to 89 Copyright ©Suggested 2010-2011NPV calculation by10 Bain & Company, framework: Inc. All rights reserved Revenue and Costs Variable Cost Cost per BH 2,000 hours per BH after 5 should assume 10 yrs for old a/c 30 10% discount rate 23

30 22 CapEx A/C purchase > USD 6m per aircraft 20 23 P r o ﬁ t 50 > USD 1m per aircraft 20 22 A/C refurbishment > USD 0.5 m per engine after 20 4,500 BH 20 Suggested framework: Revenue and Costs 30 40 Revenue50 Cost Exhibit: Iceberg cost structure of0 2L vanilla20 ice cream tub in UK P r o ﬁ t (show to candidate if this data is requested)2009 2010 2011Price 2012 Quantity 2013F Fixed 2014F Variable

Revenue Cost 1.0 Note for Interviewer: The quantitative component of this case is very straight forward. Intent is for the bulk of the interview to be spent on the qualitative elements. Copyright © 2010-2011 by Bain & Company, Inc. All rights0.18 reserved 0.89 Price Quantity Fixed Variable 0.8 Exhibit: Running costs for a typical UK online0.11 dating agency (Show to candidate if this data is requested) Note for Interviewer: The quantitative component of this case is very straight forward. Intent is for the bulk of the interview 0.10 to be spent on the qualitative elements. 0.6 Copyright © 2010-2011 by Bain & Company, Inc. All rights reserved 0.0860 0.51 5 0.19 0.4 50

Product cost €/L 15 0.11 40 0.2 0.13 30 60

0.0 Ingredients Packaging Production Distribution20 Product40 Advertising Overhead Profit Retailer

£ per customer/year cost & promos purchase price Source: Client data; BCG analysis 10

0 Marketing IT support Admin support Total costs per customer TheAcknowledgements Interview Process

Career Services would like to thank the following companies for their generous contribution to the London Business School Case Book. 36 London Business School Case Book

Bain & Company

Entertainment Co PROFIT

Case Summary for Interviewee Situation • Premier touring live entertainment company • Company has enjoyed five years of tremendous growth in ticket sales and revenue

Complication • While ticket sales and revenues have continued to grow steadily, profitability growth has lagged

Key question • What is the root cause of the client’s lagging profitability?

Please follow the steps below to guide you through the case.

Case structure – Step 1

Structure Analyse Advise

Frame the Use framework to Dig deeper Develop insights Synthesise what Make a problem guide analysis you learned recommendation

How would you frame the problem?

Suggested framework: Revenue and Costs

Profit

Revenue Cost

Price Quantity Fixed Variable

Note for Interviewer: The quantitative component of this case is very straight forward. Intent is for the bulk of the interview to be spent on the qualitative elements. Copyright © 2010-2011 by Bain & Company, Inc. All rights reserved London Business School Case Book 37

Bain & Company

Entertainment Co

Case structure – Step 2

Structure Analyse Advise

Frame the Use framework to Dig deeper Develop insights Synthesise what Make a problem guide analysis you learned recommendation

Given this framework, what questions would you ask your interviewer?

Identify the drivers that matter

Revenues Costs

Price Quantity Fixed Variable

Interviewee: Need to understand revenue drivers Need to understand cost drivers

Has there been a What has happened How have Fixed How have Variable significant change in to # of tickets sold in Costs (FC) changed Costs (VC) changed ticket prices? past five years? in past five years? in past five years?

Interviewer: Average ticket price Ticket sales volume FC have grown as VC from stop to stop changes from stop varies greatly the client has added are generally very to stop. Cities with from stop to stop. more tour stops. consistent. Primary largely wealthy Entertainment Co. is FC are generally drivers of differences populations typically more popular in some allocated by length are venue rental have higher avg ticket places than others of stop prices

Bain & Company

Entertainment Co

Exhibit 1 – Entertainment Co. financial results

CAGR $1,000M (05 – 10)

875

800 767 743

652 603 600

488

400 12% Entertainment Co. revenue 200

0 2005 2006 2007 2008 2009 2010

Gross margin 38% 34% 32% 28% 27% 25% Gross profit $185M $205M $207M $206M $206M $219M 3%

Exhibit 2 – Entertainment Co. profit margin by tour stop

50%

-25

-50

-75 Entertainment Co. profit margin City 1 City 2 City 9 City 8 City 7 City 6 City 5 City 4 City 3 City 11 City 17 City 14 City 12 City 15 City 18 City 13 City 19 City 16 City 10 City 21 City 20 Show (width equals revenue)

# of shows: 87 58 24 66 81 58 90 52 24 45 30 51 38 45 38 37 Occupancy rate (%): 91 83 94 87 98 88 95 97 58 60 46 89 68 63 66 67

Bain & Company

Entertainment Co

Exhibit 3 – Most recent performance results from 3 selected tour stops

City A City B City C Average ticket price: $100 $80 $90 Total shows: 85 45 75 Total attendance: 210,000 75,000 180,000 Occupancy rate: 95% 64% 92% Variable costs per show: $60K $50K $60K Fixed costs $8M $4M $6.5M

# of stops in previous 5 years: 5 2 3 Year of first visit: 2001 2008 2006

Case structure – Step 3

Structure Analyse Advise

Frame the Use framework to Dig deeper Develop insights Synthesise what Make a problem guide analysis you learned recommendation

How can you dig deeper to find the source of the problem? Do you have a hypothesis about what is causing the problem?

Hints Exhibit 1: Interviewee should immediately recognise disparity in growth of revenues and profit. Exhibit 2: Interviewee should point out that the unprofitable shows have shorter LOR and occupancy rates.

Bain & Company

Entertainment Co

Develop a hypothesis that you can test; dig deeper into the drivers that matter

Hypothesis: Entertainment Co’s slow growth in profitability is a result of expansion to markets that are unprofitable or marginally profitable

Revenues Costs

Price Quantity Fixed Variable

Interviewee: Avg ticket price Attendance ranges Fixed costs (which Variable costs range varies from $100 from 75K to 210K are allocated by run from $50-60K to $80 as result of different length) vary from $4M run lengths and to $8M occupancy rates

Interviewer: How does profitability vary from city to city?

Most recent performance results from 3 selected tour stops Dark grey rows to be calculated by interviewee CITY A CITY B CITY C Average ticket price $100 $80 $90 x Total attendance 210,000 75,000 180,000 Gross revenue $21.0M $6.0M $16.2M - Variable costs per show $60K $50K $60K Total shows 85 45 75 Total variable costs $5.1M $2.3M $4.5M Fixed costs $8M $4M $6.5M Total costs $13.1M $6.3M $11.0M Gross profit $7.9M -$0.3M $5.2M

Bain & Company

Entertainment Co

Case structure – Step 4

Structure Analyse Advise

Frame the Use framework to Dig deeper Develop insights Synthesise what Make a problem guide analysis you learned recommendation

What insights can you draw from the data you have?

Dig deeper to understand the implications of the profitability analysis

Key insights

Interviewee: • It appears that Entertainment Co. is growing ticket sales and revenue at the expense of profitability • They should be more selective about the markets that they enter. Several possibilities exist for continued growth. —— Stay longer in the good markets and don’t go to the bad markets —— Reduce cost of the show —— Develop a lower cost show format for the marginal cities —— Combination of the above

Interviewer: • Reducing the cost of the show is not an option for artistic reasons • We have some data on ticket sales by week in two markets that I would like you to analyze • Entertainment Co. has launched a new lower cost format show in a few markets. The new show will be performed in Ice-rinks (rather than in Theatres like the current show) —— I have the initial profit analysis of the most recent Theatre and Ice-rink show in three markets for you to analyze

Bain & Company

Entertainment Co

Exhibit 4 – Theatre show ticket sales by week

City A City C

3,000 3,000 Tickets sold

Max capacity Max capacity

2,000 2,000

Avg. attendance Avg. attendance

1,000 1,000 Tickets sold per show Tickets sold per show

0 0 Show 1 Show 7 Show 14 Show 19 Show 10 Show 81 Show 21 Show 37 Show 28 Show 28 Show 72 Show 42 Show 46 Show 55 Show 35 Show 64

Key Insights City A: Some markets continue to have strong attendance throughout (suggesting that they could add additional shows without dramatically decreasing occupancy)

City C: Other markets already see a significant drop-off in sales by the end, suggesting that there is no additional capacity for adding shows and that the city may not be able to adequately utilize the Theatre format with it’s very high FC

Bain & Company

Entertainment Co

Exhibit 5 – Ice-rink format introduced in 2010 to offer lower cost option for younger people/families

Total tickets sold Average ticket price 3.0M $125

105 100 Ice-rink

2.0 75 65

50 Theatre Theatre 1.0 84%

0.0 0.0 2009 2010 Theatre Ice-rink

Theatre occupancy rate 83% 76% Avg # of shows per stop 75 15

Exhibit 6 – Average cost structure of two show formats

Fixed costs per city visit Variable cots per show $8M $60K 60

Other 6.75

6 Marketing Accomodations Talent transport 40 40 Venue rent Other Stage Accomodations transport 4 Crew compensation Venue rent Crew 20 compensation Stage 2 construction Marketing Artist Artist Talent transport compensation compensation 0.45 0 0 Theatre Ice-rink Theatre Ice-rink

Key Insight Fixed costs per visit: Theatre format has very high fixed cost base relative to Ice-rink. This suggests a need to maximize utilization (i.e., sell as many tickets as possible)

Bain & Company

Entertainment Co

Exhibit 7 – Theatre and Ice-rink customer demographics

% of attendees by household income Share of population by age 100% 100% 65+ $150K+

$100K-150K 80 80 45-64

60 60 $50K-100K

25-44 40 40

$25K-50K 20 20

<$25K 0-24 0 0 Theatre ticket buyers Ice-rink ticket buyers Theatre ticket buyers Ice-rink ticket buyers

Key Insights 1. % of attendees by household income: Customers appear to have the same profile, which is not what the client expected to happen when they introduced the new show format.

2. Share of population by age: In fact it seems a greater proportion of Ice-rink customers are older and slightly wealthier.

Bain & Company

Entertainment Co

Exhibit 8 – Most recent Theatre and Ice-rink results

CITY X CITY Y CITY Z Theatre total tickets sold 210,000 180,000 75,000 Theatre gross profits $8M $6M -$250K Theatre incremental profit per customer $105 $95 $80 # of Ice-rink tickets sold 54K 20K 30K Ice-rink gross profits $1.9M $380K $600K Ice-rink net profit per customer $35 $19 $20 Replacement Rate* 3:1 5:1 $4.1M Breakeven Cannibalization** 19K 4K 5K *Ratio of incremental Theatre profit per customer to Ice-rink net profit per customer. We compare incremental to net because we want to understand the profit impact of losing one additional Theatre ticket assuming that person bought a Ice-rink ticket instead **# of additional Theatre tickets that would have needed to be sold to match the profit of the Ice-rink format

Key Insights 1. City X: Some markets may be able to sustain both formats without significant cannibalization. Therefore using both formats in the market may make sense.

2. City Y: Some markets appear to be more susceptible to cannibalization (i.e. only ~4K incremental Theatre tickets would have exceeded the profit of the 20K Ice-rink tickets. Entertainment Co. should probably stick to only the Theatre format.

3. City Z: Theatre format is not always profitable. Remember that there are very high FC so if you cannot sell a large # of tickets it might make sense to use the lower cost format.

Bain & Company

Entertainment Co

Case structure – Step 5

Structure Analyse Advise

Frame the Use framework to Dig deeper Develop insights Synthesise what Make a problem guide analysis you learned recommendation

How would you bring together everything you have learned?

Go back to your initial hypothesis

Key Insights • The root cause of the slower growth in profitability is that as Entertainment Co. has grown they have not segmented their markets and used the appropriate show format or length of stay —— Theatre show has very high FC and therefore should only be taken to cities that can support a lot of shows and sell a lot of tickets, otherwise Ice-rink format may be a better choice —— Some markets can probably sustain both the Ice-rink and Theatre formats —— Cannibalization is a risk that must be mitigated. Ice-rink format should only perform in cities where it is very likely to not impact Theatre sales

Bain & Company

Entertainment Co

Case structure – Step 6

Structure Analyse Advise

Frame the Use framework to Dig deeper Develop insights Synthesise what Make a problem guide analysis you learned recommendation

This is your client. What do you tell them?

Recommend a practical course of action to achieve results

Key Insights • Improve profitability by segmenting markets —— Large markets (e.g., City A) where cannibalization is relatively low risk should be targeted for both the Theatre and the Ice-rink format —— Medium markets (e.g., City B) should be limited to only the Theatre format to avoid cannibalizing the more profitable Theatre ticket sales —— Small markets (e.g., City C) should be limited to the Ice-rink format which can deliver greater profits than Theatre

• Result will be higher penetration in large markets, improved profitability per ticket sold in the medium markets, and greater profits (at a lower risk due to lower cost base) in the small markets

Bain & Company

Entertainment Co

Case Summary for Interviewer only

Detailed case answer: Entertainment Co.

• Client is a live entertainment • Possible solutions include: • However introduction of the company that tours around the Avoiding unprofitable markets, new format creates a risk of world staying for longer in profitable cannibalizing the very profitable markets, and introducing a new Theatre show in certain markets, • In recent years, the client has lower cost show format so cannibalization must be witnessed slower than expected mitigated by appropriate tour growth in profits despite double- • The Theatre format has very high planning digit growth in ticket sales and fixed costs, as ticket prices are revenue high and show run lengths are • Client should plan tours so that long so once costs have been they only go to markets with • Cause of the slower profit covered, every incremental ticket is Ice-rink that are not suitable growth is that due to expansion, profitable for Theatre (i.e. not enough Entertainment Co. has started Theatre sales to cover high FC) to visit several cities that do • Ice-rink costs are substantially or can sustain both formats not sell enough tickets to cover lower and run lengths without causing significant costs are shorter so it may be cannibalization and stay for more appropriate in certain more shows in good markets underperforming Theatre markets where they can likely sell more tickets

Bain & Company

Entertainment Co

Detailed Case Structure: Entertainment Co.

Structure Analyse Advise

Frame the Use framework to Dig deeper Develop insights Synthesise what Make a problem guide analysis you learned recommendation

Q: How would you Q: Given this Q: How can you Q: What insights can Q: How would you frame the problem? framework, what dig deeper to find you draw from the bring together questions would you the source of the data you have? everything you have A: Disaggregate ask your interviewer? problem? learned? drivers and A: Some markets have components of A: Drill into price and A: Dig in to price and much lower ticket A: Ice-rink show has revenue and cost cost drivers over time cost drivers by market prices and attendance, shorter run lengths, or by different market suggesting that they may be appropriate Q: Do you have a may be inappropriate where Theatre cannot hypothesis? for such a high cost sustain long runs and product cover FC. But in cities A: As Entertainment with long Theatre runs, Co. has grown they Ice-rink format should have started to be avoided visit cities that are unprofitable Fist pass

Q: Quantitative? Q: Draw insights Q: Synthesize the new Q: This is your client. data What do you tell them? A: Compare the A: Potentially profitability across introduce a lower cost A: Cannibalization A: Plan your tours so multiple cities and show may be a problem in that you choose the look for root causes of select markets. Market right format for the variances segmentation will be right markets and sell required to avoid it the most profitable

In-depth analysis In-depth tickets for that market

Copyright © 2010-2011 by Bain & Company, Inc. All rights reserved. Bain & Company grants the London Business School permission, without charge, to use, copy, modify, merge, publish, distribute, sublicense, and/or sell copies of the content in the above Bain & Company practice case (the “Works”) subject to the following conditions: The above copyright notice set forth at the bottom of each page and this permission notice shall be included in all copies or substantial portions of the Works. THE WORKS ARE PROVIDED “AS IS”, WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. IN NO EVENT SHALL THE AUTHORS OR COPYRIGHT HOLDERS BE LIABLE FOR ANY CLAIM, DAMAGES OR OTHER LIABILITY, WHETHER IN AN ACTION OF CONTRACT, TORT OR OTHERWISE, ARISING FROM, OUT OF OR IN CONNECTION WITH THE WORKS OR THE USE OR OTHER DEALINGS IN THE WORKS. 50 London Business School Case Book

BCG

Iceberg PROFIT

Europe

Case at a glance (for the interviewer only)

Part A Part B Part C Structure & hypothesis Interpretation & numeracy Recommendations & summary

Opening statement: Present the candidate with the slide Ask the candidate: “Our client is Iceberg, a major titled: “UK ice cream tub prices” and “What strategies could Iceberg use global branded ice cream producer. tell them: to address the performance issue in Iceberg develops, manufactures and “The Associate on this case prepared Europe and how would you prioritise markets ice cream products and this slide. What is causing the them?” sells to retailers who, in turn, sell to performance issue in Europe?” the end consumer. Ice cream is one (If the candidate is struggling, ask: of the most profitable products that “How should Iceberg segment the Tests strategic thinking, creativity Iceberg makes. The business has market and what is happening in each and ability to prioritise and provide grown at 5% led by North America segment?”) reasons and developing markets. However, Iceberg has recently seen poor growth and competition intensifying Tests business intuition and “What are your recommendations for in the European ice cream market, in the ability to interpret data, Iceberg’s management?” particular from supermarkets’ own- draw conclusions and identify brand ice cream. Iceberg management implications are sure they have great products: Tests ability to synthesize and they continue to win in consumer taste structure recommendations, tests, there is a strong pipeline of “How does the market opportunity business intuition and empathy planned product launches, and they compare to Iceberg’s business have strong brands in many markets. today?” Management believes this allows them (If the candidate is struggling, to sell their products at a higher price ask: “Which segment would you than the competition. What could recommend Iceberg focus on and be causing the performance issue in what is the margin and volume Europe?” potential in that segment?”)

Tests ability to structure a Tests numeracy, ability to make problem and state and explain a reasonable assumptions, degree clear hypothesis of confidence/insecurity and personality in the face of challenge to their work (ask “Are you sure you’re right?”) London Business School Case Book 51

BCG

Iceberg

Key case insights an excellent candidate might uncover (for the interviewer only; do not tell the candidate) • There are 3 market segments: • Iceberg is winning market share in • In any given segment economy, mass market and a shrinking mass market recommended: Iceberg’s volume, premium-priced products margin or profit potential; its • Premium segment is likely growing, competitiveness to customers • Iceberg competes primarily in the as brands distinguish themselves and consumers (realising they are mass market segment (defined as from the mass market to retain and different); and its ability to win price points €2.00 – 3.99), with a grow margins against branded and private label ~38% market share by value (€46m products out of €122m), ~34% by volume • To compete, Iceberg should: (15m L out of 44m L) —— Drive volume to improve plant utilisation (~35% in Western This case is long and candidates Europe, vs. ~60% in North would not necessarily be expected If the candidate delineates 3 America) and reduce unit to finish it segments slightly differently, their costs, so that it is better able to market size and share numbers compete on price in the mass would differ accordingly market —— Increase presence in premium (relying on taste performance • Mass-market consumers are and strength of brand) becoming more price conscious —— Optimise drivers of consumer (sales of €2.00-2.59 are strongest purchasing behaviour besides in the mass market category) price (e.g. packaging / advertising / shelf placement) • In the mass market and economy —— Potentially expand in the upper segments, Tesco is undercutting end of the economy market, Iceberg and other competitors although its retailer purchase on price, growing the economy price may be less competitive segment and pushing down Iceberg’s revenue in the mass market 52 London Business School Case Book

BCG

Iceberg

Exhibit: UK ice cream tub prices (show to candidate)

Market price architecture Example products

7.00 -7.99

6.00-6.99 Haagen Dazs Ben & Jerrys 5.00-5.99 Tesco Finest 4.50-4.99

4.00-4.49

3.50-3.99

3.00-3.49

2.50-2.99 Iceberg 1L Vanilla €2.82

Retail price segment €/L 2.00-2.49 Tesco 1L Vanilla €2.22

1.50-1.99

1.00-1.49

0.00-0.99 Tesco Val. 2L Vanilla €0.78

0 5 10 15 20 25 30 35 40 Market value of price segment at retail price 2012 (€m)

Iceberg ice cream tubs Other company ice cream tubs

Source: Nielsen: Store research; BCG analysis

Exhibit: Iceberg cost structure of 2L vanilla ice cream tub in UK (show to candidate if this data is requested)

1.0

0.18 0.89

0.8 0.11

0.10 0.6 0.08 0.51

0.19 0.4 Product cost €/L 0.11 0.2 0.13

0.0 Ingredients Packaging Production Distribution Product Advertising Overhead Profit Retailer cost & promos purchase price Source: Client data; BCG analysis London Business School Case Book 53

BCG

Iceberg

Exhibit: Iceberg global ice cream production plant utilisation (show to candidate if this data is requested)

Europe N America 100% 100% 80 80 Max Max 60 70% 60 70% 40 40 20 20

0 0 A B C D E F G H IJ K L A B C D E F G H I

Western Europe CEE

Production plant size Production plant size

Productive capacity Unused capacity (based on 8760 hrs per year)

Example of a possible case structure (for review after the case interview)

What can Iceberg do to improve their competitiveness in Europe?

Product Pricing Cost structure Competition (compare with) (compare with)

Other branded ice creams Other branded ice creams Fixed costs Distribution channels

Own label ice creams Own label ice creams Variable costs Shelf positioning

Substitutes Substitutes Promotions (other desserts) (other desserts) 54 London Business School Case Book

BCG

Iceberg

Differentiation between poor, average and superior performance (for review after the case interview)

Poor Performance Average Performance Superior Performance Framing problem / Suggests what Sets out a structure for Sets out a clear, logical prioritising issues supermarkets are doing analysis; identifies 3 price structure for analysis; without clear rationale segments, and possibly recognises that market or structure; does not that supermarkets have has three segments, consider differences power because Iceberg is with Iceberg strongest in across the range of reliant on them to sell its the mid-price segment; supermarket products products identifies need to understand Iceberg's ability to compete

Identifying relevant Starts asking for a variety Asks a series of specific Defines information information of information – no clear questions related to a needed, including logic single logical line; identifies rationale; identifies key some key points from points and explains their the graphs; can process implications from the answers and move on graphs presented

Running calculations / Calculates incorrectly that Correctly calculates Realises lowering price drawing conclusions from Iceberg cannot compete at Iceberg can compete at may dilute margins and facts supermarket price points lower price points except suggests ways to avoid; Tesco Value and quantifies identifies production margin utilisation issue and proposes solution; Calculates volume / revenue / profit potential

Identifying key implications Limited or Needs to be asked Identifies the key case and next steps; illogical additional for ideas on potential insights; drives to demonstrates creativity recommendations solutions; has a few ideas solutions on their own; on where to improve; for how to improve prioritises a list of alternate formulaic approach opportunities; goes beyond (e.g. spend more on the obvious throughout the marketing) case process London Business School Case Book 55

BCGThe Interview Process

Market Cupid’s Arrow Entry

North America v United Kingdom

Case at a glance (for the interviewer only)

Part A Part B Part C Structure & numeracy Analysis & business judgement Recommendations & summary

Do not share any exhibits until Candidate is expected to continue Ask the candidate: Part B with their case analysis. Share facts of “So, what recommendations would the case or exhibits (see the following you make to Cupid’s Arrow’s 1) Structuring the case pages for details) when these are management?” specifically asked for by the candidate. “Our client is Cupid’s Arrow, a successful subscription-based online When sharing an exhibit, ask the Tests ability to synthesize and dating agency. They currently operate candidate: structure their recommendations, exclusively in the US market, where “What does this exhibit tell us? How business intuition and empathy they are the market leader. Cupid’s might this affect Cupid’s Arrow’s entry Arrow are considering entering the into the UK market?” UK online dating market. What are the main factors that they should consider?” Tests business intuition and the ability to interpret data, draw conclusions and identify Tests ability to structure, implications hypothesise and think creatively around a problem

2) Market size estimation

“How would you estimate the size of the UK online dating market?” (if the candidate is struggling, clarify this as being “revenue per year”)

Tests structure, numeracy and ability to make reasonable assumptions

“What does this tell us so far about the attractiveness of the market for Cupid’s Arrow? What else do we need to think about?” 56 London Business School Case Book

BCG

Cupid’s Arrow

Key case insights an excellent candidate might uncover (for the interviewer only; do not tell the candidate) • The UK market will nearly double —— The UK soul mates segment • Entry into the UK market could be in size over the next 2 years and is may already be quite via organic growth or syndicated quite fragmented with at least a few competitive: HappyHearts (33% from the existing US Cupid’s Arrow new entrants share and 20% p.a. growth) and site, but would be fastest via Lovebirds (23% share) together acquisition and rebranding of a • Profit margin is healthy at 75% per have ~75% share and the soul smaller site, for instant network customer (£180 p.a. per customer) mates segment is only 25% of effects between subscribers. Given the UK market the anticipated pace of growth in • Cupid’s Arrow may struggle in —— UK may increasingly shift the UK market and the likely lock-in entering the UK market (candidate towards soul mates, like the effect in this market based on the may take a slightly different view US as online dating loses its size of a subscriber base, of the future direction of the UK stigma, but it is not there yet acquisition and rebranding of a market and optimal strategy, but is smaller site would be advisable expected to support their position • Overall, the UK market is attractive, with similar insights): but may require Cupid’s Arrow to —— There is greater stigma around adapt its image / focus in the UK This case is long and candidates online dating in the UK (65%) more towards the interests of UK would not necessarily be expected than in the US (35%), although customers (socialising / casual to finish it this is declining over time dating) and to form a clear strategy —— Cupid’s Arrow’s core strength to compete against the aggressive in the soul mates segment in growth of HappyHearts and the the US (60% of the US market), threat of new entrants is less applicable in the UK where this segment comprises • Along with a clear strategy, only 25% of the market aggressive marketing campaigns (socialising and casual dating and friend referral benefit schemes, segments comprise 75% of etc. are key to establishing a the market) presence in the UK market

Facts to share with the candidate if asked for specifically (for the interviewer only) • Cupid’s Arrow currently has US • Set-up costs for Cupid’s Arrow • “Exhibit: Running costs for a revenues of USD$30m per year in the UK for organic growth typical UK online dating agency” are minimal (e.g. IT equipment, – share if asked about costs / • Cupid’s Arrow currently focuses on customer survey) profitability finding “soul mates” / life partners for its subscribers in the US • HappyHeart’s growth is due to • “Exhibit: US vs. UK perceptions aggressive marketing campaigns of online dating” – share if asked • Expected revenue for Cupid’s and friend referral benefit schemes about market segmentation / Arrow in the UK is £20 per month demographic differences / types of per customer • “Exhibit: Historic and projected online dating sites in the US versus growth of the UK online dating the UK market “ – share only in Part B of the case (after the market sizing) – if asked about market growth or competition London Business School Case Book 57

BCG

Cupid’s Arrow

Exhibit: Historic and projected growth of the UK online dating market (show to candidate if this data is requested)

300 CAGR ’12-’14 278 Other (~ 20 players <£2m) +36% 250 Table4Two TakeAChance CAGR 204 200 TakeMeOut ’09-’12 +19% MatchMeUp 150 150 Lovebirds 133 30 HappyHearts 30 5 99 10 UK revenue (£m) 100 89 10 10 30 10 23 30 22 20 23 50 20 22 20 20 30 40 50 0 20 2009 2010 2011 2012 2013F 2014F

Exhibit: Running costs for a typical UK online dating agency (Show to candidate if this data is requested)

60 5

50 15

30 60

20 40 £ per customer/year

0 Marketing IT support Admin support Total costs per customer 58 London Business School Case Book

BCG

Cupid’s Arrow

Exhibit: US vs. UK perceptions of online dating (show to candidate if this data is requested) Responses to questions from a survey

Question 1: Do you believe there is a stigma Question 2: What are you looking for from an around online dating? online dating agency?

50 50 60 60

50 40 40 40 40 30 35 25 25 30 20 20 25 25 20

% respondents % 15 respondents % 15 10 10 10 5 0 0 US UK US UK

Yes Meet new people for socialising Yes, but less than it used to be Find someone for casual dating No, not anymore Meet my soulmate/life partner No, there never was

Source: Survey of a random sample 20-45 year olds from the US and UK (n=100 in each country)

Example of a possible case structure (for review after the case interview)

Main factors affecting the attractiveness of the UK online dating market for Cupid’s Arrow

Overall attractiveness of Market attractiveness Competition in relevant Market entry method the UK market to Cupid’s Arrow segment

Value proposition in the Syndicated from US site Size Current competition US vs UK into UK

Growth rates New entrants Organic growth

Profitability Acquisition London Business School Case Book 59

BCG

Cupid’s Arrow

Example calculation for the size of the UK market (For review after the case interview)

Drivers Assumptions

UK population 60m

% in target age range for 50% dating websites (20-60 yrs)

X Number of UK % of target range that customers 33% are single 0.5m X % of single potentials Subscription revenue: that are interested in 25% Total size of the UK internet dating X market (£/year) X

£120m % willing to pay for a 20% subscription service

Revenue per customer Subscription fee £20/month per month £240/year

A superior candidate may also identify other revenue streams (e.g. advertising and events) 60 London Business School Case Book

BCG

Cupid’s Arrow

Examples of creative ideas to maximise success in the UK (for review after the case interview)

Candidate may take different views of optimal strategy – not all of these will apply

Potential views of challenges Potential creative solutions

The UK has a stigma around online dating, compared Adapt marketing to integrate with the UK market to the US market • Be less overt about finding “The One” • Emphasise socialising and meeting new people • Supplement UK sites with in-person social events

HappyHearts is expanding aggressively through Analyse the target segments of HappyHearts marketing campaigns • Survey the target customers to understand their needs and identify those met by HappyHearts • If this segment is attractive to Cupid’s Arrow in the context of its new brand, offer initial sign-up deals (e.g. first 2 months free) and some free events

UK customers are looking for a different type of online Rebrand in the UK towards a more social focus service (socialising / casual dating), less geared • Appropriate branding to attract a wider pool of singles towards finding a life partner • Modify the website to emphasise meeting friends/ casual dates as well as partners • Offer regular managed events to get single people together in a fun setting (e.g. ice skating, bowling)

Although 75% UK market is today focussed on Expand existing US site directly into the UK with socialising / casual dating, with rapid UK market strong branding to reduce online dating stigma growth, online dating is expected to rapidly lose • Maintain focus on finding life partners its stigma and customers will increasingly seek life • Aggressive, wide marketing base showing real partners online, as has been the case in the US members and matches to emphasise that “everybody’s using it” • Expect potentially slow growth until stigma reduces London Business School Case Book 61

BCG

Cupid’s Arrow

Differentiation between poor, average and superior performance (for review after the case interview)

Poor Performance Average Performance Superior Performance Structuring the analysis Only identifies one or Sets out a good structure Sets out a clear, logical two factors that affect for analysis- identifies at structure for analysis; the attractiveness of minimum three factors. touches on wider issues the market (e.g. market Is able to provide a few such as the attractiveness size, growth) and needs explanatory points about of the UK in the wider significant prompting to each factor context of the client's think of other factors. business (e.g. compared to May focus exclusively on other potential markets) revenues/costs

Making a market size Struggles to identify the Makes a clear structure Makes a clear structure for estimate main drivers of the market. for estimation, makes estimation and completes Does not have a rough no / very few errors with analysis with confidence idea of UK population. numerical steps and enthusiasm. Struggles to provide Makes insightful rationale for estimates. commentary around Makes basic numerical estimate assumptions. errors Acknowledges potential other revenue sources.

Interpretation of graphical Needs significant Correctly interprets main Identifies all main trends figures; identifying key info prompting to understand competitor trends from plus more subtle features output. Draws only basic graph, is able to calculate of graphical outputs, conclusions from the data; profit margin, understands asks probing questions little insight some of the survey findings (e.g. Do we know what is with little prompting driving the doubling of the market size?) and suggests hypotheses; synthesizes clearly between the market and survey exhibits

Synthesizing key Poor recollection of main Can correctly draw Summary is a well findings and making findings; laundry list together key findings with synthesized and structured recommendations; recall with little synthesis reasonable synthesis of view that incorporates demonstrating creativity / insight. Unable to ideas; needs prompting all the main findings. provide creative ideas for to come up with creative Drives independently to success in the market (e.g. ideas for Cupid’s Arrow to the need for a change suggests just offering a be successful in strategy for entry into low subscription price) the UK, gives a clear strategy recommendation and rationale and makes creative suggestions

62 London Business School Case Book

Booz & Company

Market Business Class Airline Entry

Europe

Case Question Our client is a budget airline considering entering a new market for business class flights. They are considering running an all business-class service within Europe. They want your advice on whether this is a good idea, and if so, how they should do it.

Intro Facts (tell the candidate if asked) Key Insights (do not tell the candidate) Q: What is the client’s current business • Issues exist around the brand of a low cost airline, A: A range of cheap short haul flights from the UK to various meaning the rebranding might be necessary European destinations • Landing slots at hub airports are critical to business Q: Do they offer any business class flights at the moment? travel, and will be very hard to acquire A: No, but passengers can pay for various upgrades such as speedy boarding and greater legroom • They do not have the full set of capabilities required to deliver a business class service, so choice of partners Q: How is their current brand perceived? will be critical A: Extremely cheap, but very low quality service

Case at a glance

Part A Part B Part C

Structure the case and discuss the Identify some innovative service Work out the cost to break even on a challenges that will be involved in offerings for the luxury tourism market flight to Vienna entering this market

Structure – Use a classic 4Cs market entry structure

Market Entry Structure

Customers Competition Capabilities Entry Mode

Business Travellers Incumbent Airlines Existing slots at airports Set up new subsidiary

Provision of onboard and Luxury Tourism Possibility of new entrants Acquire existing company airport services

Substitute products Brand London Business School Case Book 63

Booz & Company

Business Class Airline

Structure – Examples of typical questions that the interviewer could ask around each of the four areas

Customers Competition

Business Travellers • How will incumbent airlines react to this? • How price sensitive are they? • Are alternatives such as train travel serious competition? • What is most important to them? • Can they position themselves as competition to other airlines’ economy offerings? Luxury Tourists • Is there a likely market for this? • How would it differ from the market for business travellers?

Capabilities Entry Mode

• Will their budget brand be a limitation or an asset? • Can this simply be launched as another route with a • What capabilities do they have as a budget airline that different service? are particularly useful? • Whom could they partner with? • What do they not currently do that they will need to be • Is an acquisition or partnership a viable option? good at? • Should they consider setting up a new company? • Do they have access to landing slots?

Creativity – Here are some ideas for innovative services in this market Basic Ideas More Innovative Ideas 1 Fly a scheduled service to high end holiday resorts 1 Charter to luxury cruise lines to offer passengers flights 2 Partner with luxury hotel chains and travel companies to to the ship offer packages 2 Do not fly scheduled flights, but focus on one off flights 3 Fly from regional airports and include a chauffeur to get to key European social events – Monaco Grand Prix, passengers there Paris Fashion Week, LBS winning MBAT 3 Offer packages including entry to these events 4 Run on board events, such as wine tastings 5 Offer ‘experience flights’ e.g. over the North Pole 64 London Business School Case Book

Booz & Company

Business Class Airline

Calculation – Our first destination will be Vienna. How much would we have to charge to break even with 25 / 32 seats filled?

What are the main cost items that you would expect an airline such as this to face?

Costs

Airport charges – Fuel Aircraft dry lease Aircraft servicing Aircrew costs Other overheads Landing, passenger Catering costs use of facilities

2 pilots @ £700 ph 6000kg @ £0.5 / Kg £2500 / flight £600 / flight £1500 / flight £900 / flight £1400 / flight 3 crew @ £400 ph

• The figures in each cost item can be given to the interviewee, although they should expect to make a reasoned estimate where possible • Any cost items the interviewee does not identify should be given to them • The interviewee should then work through to the answer below

Revenue 25 Passengers £12,500 costs £500 per passenger London Business School Case Book 65

Booz & Company

Business Class Airline

Differentiation between poor, average and superior performance (for review after the case interview)

Poor performance Average performance Superior performance Framing problem / Fails to offer a structure Uses a 4Cs structure well, Uses the structure to prioritizing issues or to understand what is and identifies some of the identify where the major relevant within it major challenges challenges lie and has ideas about how they might be resolved

Identifying relevant Struggles to identify what Identifies a number of the Identifies a number of information the cost categories are, major cost categories, can the cost categories, does not ask the right make reasonable rule of understands what drives questions to get there thumb estimations them and can make estimations

Running calculations / Struggles with arithmetic, Reaches an answer and Reaches an answer drawing conclusions from unable to work out a break shows the ability to sense easily and demonstrates facts even figure check their numbers structure in their approach

Identifying key implications Thinks of only basic ideas Comes up with 3-4 ideas Comes up with a wide and next steps; for the airline service, for the airline service which range of ideas, including demonstrates creativity probably things that are are at least sensible innovative ones that may being done already not have been heard before 66 London Business School Case Book

Booz & Company

Rapid Margin Improvement Profit

GeographyEurope of the case

Case Question Our client is a packaging coating company that produces coatings to protect beverage cans. They are experiencing a profit margin erosion and would like you to help them restore profitability without modifying their cost structure.

Intro Facts (tell the candidate if asked) Key Insights (do not tell the candidate) Q: Where and what is the company producing? Without touching at the cost structure, volume, price & A: They provide European fillers with coating for the inside product mix are the key levers to improve margins. of beverage cans. The most effective margin lever is price, hence we shall Q: What explains the margin erosion & is competition facing focus on improving the pricing strategy. the same challenge? A: The reason is macroeconomic: a slow economic recovery since the financial crisis & a raw material volatility have been affecting the entire market.

Q: What is the specific objective & what is the deadline? A: A 5% profit margin improvement is expected within 2 yrs

Case at a glance

Part A Part B Part C

Let’s review the main pricing Identify some innovative service Let’s estimate the price increase strategies to fix prices. Let’s look at a value-based pricing that could be realized thanks to a Discuss the main 3 pricing strategies: approach for their product: what value-based pricing approach on cost-based; value-based; competitive- could be the benefits that customer their product. based pricing strategies. are looking for? Based on the following 3 benefits - Imagine potential customer benefits Technical Assistance; Coating Waste from product features & services Reduction & Scratch Resistance - let’s offerings. assess the potential price impact (total gain, gain per Kg and % price increase). London Business School Case Book 67

Booz & Company

Rapid Margin Improvement

Example of Structure

Margin Levers (Excluding Cost) Revenue = Price x Volume

Maximising Pricing Increasing Sales Volume

Increase Average Selling Price of existing products Increase Market Share at existing customers (Elasticity) (more often, more per command, for longer, etc.)

Improve Product Mix by selling more high margin products Reach out to new customers (Positioning) (within the existing area or in new regions)

Structure – How do you set price and what are the main pricing strategies?

Value / Benefits Driven Raw Material / Cost Driven Market / Competitor Driven

Base prices on product and service Base prices on raw materials volatility Base prices on competitor prices, benefits to be shared between the to reduce margin exposure supply-curve, and supply/demand customer and the supplier balances

• Works better if product or service • Works better if raw materials are • Works better if competitor prices benefits are explicable to the increasing and are expected to are known and collecting them is customers – ideally quantifiable continue to do so legal • Works better if customer knows • Works better if price negotiation • Works better if price elasticity is the next best alternative prices period is shorter than the calculable and features purchasing period 68 London Business School Case Book

Booz & Company

Rapid Margin Improvement

Creativity – Let’s now focus on value-based pricing: what could be the customer benefits of a coating product for the inside of cans of soda? Below Average: Average Above Average Thinks about a couple of product Suggests: Same as before plus a couple of the features but does not manage to • Reduce down time to increase following: translate them into benefits for the productivity • Protect brand image (scratches, customers • Reduce product usage taste, customer claim) • Reduce labour cost • Provide local support • Extend product life expectancy • Fulfil legislation compliance • Shift ordering responsibility to the supplier

Comes up not only with product related but also service based benefits

Quantitative analytics – What is the potential price increase to be realized thanks to a value-based pricing strategy on a coating product for soda cans? Q: What is the price and volume sold of our product? A: We sold 500 Tons of AquaCoat at €2.25 / Kg to our only client

Q: What is the next best alternative and what is its price? A: The closest competitive product is Prime Coat and costs €2.00 / Kg

Q: What are the key differentiating benefits of our products? A: The main benefits are technical expertise, coating waste reduction and scratch resistance

Benefits Assumptions Calculation Total Saving & Price Impact / Kg

Technical • Technicians on site: 20 Days / Year Days of Technician 20 €18,000 Total Assistance • Cost of a technician: €150,000 / Year x [ Daily Cost €500 (150K / 300) €0.04 / Kg • Travelling Expenses: €400 / Day + Travelling cost €400 ]

Coating Waste • 4% product saved Product Saved 4% €50,000 Total Reduction • Cost of disposal: €250 / Ton x Volume 500,000Kg €0.10 / Kg x [ASP €2.25 + Disposal €0.25]

Scratch • Reduce scratched cans by 4% of the Product Saved 4% €200,000 Total Resistance overall production x Cans 250M (500,000/0.002) €0.40 / Kg • 2 grams of coating / can x Can cost €0.02 • Filled can cost: €0.02 / Can

€268,000 Total €143,000 Total {268,000-[(2.25-2.00)*500,000]} €0.54 / Kg Potential Price Increase: €0.29 / Kg (0.54-0.25): +24% (2.79/2.25) London Business School Case Book 69

Booz & Company

Rapid Margin Improvement

‘Differentiation between poor, average and superior performance’ (for review after the case interview)

Poor performance Average performance Superior performance Framing problem / Focusses on potential cost • Only one level tree Draws at least a 2 level tree: prioritizing issues savings (off topic) • Just mentions price & • Price from ASP & volume product Mix • Volume from new & existing customers

Explains with case terminology

Identifying relevant • Comes up with • Understands the • Imagines 3-5 relevant information less than 2 pricing industry potential customer strategies • Figures out objectives benefits • Comes up with less • Comes up with ideas to • Refers to the filler’s than 3 product benefits improve volume & price supply chain • Lists 2 pricing • Finds all 3 pricing strategies strategies

Running calculations / drawing conclusions from • No clue on how to • Mixes units or makes a • Perfect flow to come facts assess the premium calculation error once up with the numerical generated by each • Finds the potential solution & proactive benefits financial gain of each about assumptions • Forgets to include the benefits but does • Puts outcome in price difference vs. not put findings in perspective: +24% the competition in final perspective and does • Mentions next steps: outcome not do the “So What?” Difficulty to pass it all • Mixes units (day vs. to the customer year or tons vs. Kg) • Multiple calculation errors

Identifying key implications • Just thinks of • Articulates wrap up As before plus: and next steps; increasing the price including clear answer • Thinks of a strategy demonstrates creativity by the exact number to improve margins to conduct the pricing estimated during the • Understands the need negotiation case to share the benefits • Includes next steps in with the customer the wrap up 70 London Business School Case Book

Booz & Company

Mobile Network Revenue Generation Profit

United Kingdom

Case Question Our client is a mobile network operator in the UK. It has recently been suffering from high costs driven by increasing data usage, and this has led to a fall in profit. They want to explore options for increasing their revenue

Intro Facts (tell the candidate if asked) Key Insights (do not tell the candidate) Q: Is it just data usage driving costs? • The market for mobile network operators is becoming A: Yes. Growth in data usage leads to the need for constant commoditised – there is little to distinguish between investment in the network infrastructure and higher running networks and customers switch easily if prices are costs too high

Q: Are we interested in reducing costs? • The money in mobile internet is made by those who A: Of course, but it’s out of our scope control the content, not the flow of data

Q: What is the charging structure? A: There is a monthly line rental, which includes some calls and SMSs, and beyond that calls are charged per minute, SMS per message, and data is unlimited on all tariffs for a £5 monthly fee

Case at a glance

Part A Part B Part C

What are the drivers of revenue for Beyond the commodity business of A quantitative assessment of whether a mobile network operator and what transmitting data, in what other ways it would be better to charge customers improvement levers do we have? could a network operator generate per Mb of data used rather than a fixed revenue from the growth in the mobile fee, and a qualitative view on whether internet? it is a good idea or not.

Structure – A particularly good structure for this case is one that really understands the breakdown of quantity and price

Revenue = Qty x Price

Quantity Price

Number of individual Phones / Devices per Monthly fixed charges e.g. Fixed Monthly Line rental customers customer data, roaming

Other services, e.g. Price per unit of usage Price of content Level of usage content (minute, MB, SMS) (payable to the network) London Business School Case Book 71

Booz & Company

Mobile Network Revenue Generation

Discussions around the structure – Could involve some of the following

Possible Discussion Topics Not Exhaustive

Number of Devices • Increase market share by winning customers from other networks —— How? If those customers also consume a lot of data, what will the impact on costs be? • Create new devices that people may sign up to in addition to their existing ones —— What sort of device? How will we charge for the data on it?

Usage • Drive increased usage of those services where we are able to charge on a ‘per-usage’ basis —— Would we have to lower price to do that? Are there ways we could increase the value-add of our services? • Conversely we could try to discourage data usage if it is charged on a flat fee basis, to reduce costs rather than increase revenue —— How? Introduce limits?

Pricing Models • Increase the fixed price we charge for data —— Could this make us uncompetitive? • Introduce a variable charge for data based on how much people use, e.g. a cost per Mb —— Would this scare off the high data users? Would that even be a bad thing? • Use a combination of the two, such as a range of different packages —— How might you segment your users? 72 London Business School Case Book

Booz & Company

Mobile Network Revenue Generation

Creativity – Transmitting data is becoming commoditised. How else might the network generate revenue from mobile internet?

Possible Ways of Generating Revenue Not Exhaustive

Positives Negatives Create content and charge • The network will get the full revenue for • Network operator likely to have no customers for it any content it creates experience at generating content

Charge for hosting • Can provide customers with a easy • May be difficult to persuade content content, i.e. a web portal way of finding suitable content owners to provide content if they can where content owners • Could be a distinguishing feature for offer it for free elsewhere pay for their content to be the network, e.g. Apple Apps Store included

Introduce advertising to • Generates easy revenue • Likely to meet resistance from the network customers who are already paying

Other services e.g. credit • Creates a new revenue stream for the • Requires close involvement of device card readers, stolen car networks manufacturers and access to new trackers etc markets

• A strong candidate will identify a number of ways of monetising content and creating further forms of usage, understand the positives and negatives of each and form a view on what the network has the capabilities to actually do. They may get to this stage without prompting

• An average candidate will identify some additional ways of generating revenue and understand which are more suitable than others

• A poor candidate will identify one or two additional options, but recommend those that are not likely to be suitable for a network operator to do London Business School Case Book 73

Booz & Company

Mobile Network Revenue Generation

Calculation – How much additional revenue could we generate if we charged users £0.05 per Mb rather than £5 monthly fixed fee? Would you recommend doing this?

The 15m users figure and the usage data is given to the candidate, although they should This should all be calculated by the candidate ask for it first

Top 10 % 1000Mb x £0.05 15m x 10% x £50 Average – 1Gb £50 £75m

2nd 40% 100Mb x £0.05 15m x 40% x £5 Average – 100Mb £5 £30m

3rd 40% 10Mb x £0.05 15m x 40% x 50p 15m users Average – 10Mb £0.50 £3m

Bottom 10% 0Mb x £0.05 Total = £108m No data package £0

£5 x 15m x 90% Additional revenue = £5 fixed fee £67.5m £40.5m

Proposed Pricing Current Pricing 74 London Business School Case Book

Booz & Company

Mobile Network Revenue Generation

Differentiation between poor, average and superior performance (for review after the case interview)

Poor performance Average performance Superior performance Framing problem / Uses a standard profit A good structure that is The ability to understand prioritizing issues framework and examines able to break quantity and which measure of quantity costs instead of revenues price down to at least 2 is relevant depending on components within each how the price is charged

Identifying relevant Does not understand that As a minimum identifies Would identify what is information the fixed fee for data is the that charging for data with driving data usage, and problem, and focusses on a fixed fee is the problem, then begin to discuss other other factors instead and suggests alternatives ways of generating revenue from this

Running calculations / Fails to account for the The right answer as a An understanding of drawing conclusions from current revenues, or a minimum, structured by whether this is a good facts simple average of data use each usage segment idea based on more than across all customers a comparison of numbers, showing good commercial sense

Identifying key implications Thinks in terms of pricing One or two good ideas As per an average and next steps; models only, fails to around monetising content, candidate, but would show demonstrates creativity understand where the and understanding of the a real understanding of money is in mobile internet, pros and cons of each where money is being suggests things that will made in mobile internet also drive up costs and what the network has the capabilities to do London Business School Case Book 75

L.E.K. Consulting

NewCo Petrol Retailer Investment

Case Background You are an entrepreneur on an island However, you do not have any She asks you to estimate what capital of 50 million people. You feel that there meaningful capital and are going to you are likely to need in the business. is an opportunity to invest in petrol need to raise the investment required retailing (there are already 1,000 petrol so you visit your local banker. stations on the island).

If prompted, the interviewer will clarify that no additional information is available to answer the question.

You have not been given much The approach set out below starts together with a reasonable assumption information with which to form a by determining the potential sales of for the required rate of return on view of the size of the investment the new petrol outlet, which in turn capital, the amount of capital required required. Before starting to answer the depends on the total market size from the bank can be calculated. question, it is worth taking a minute and expected market share. The to think through a logical framework economics of the business are then to structure your response, and to mapped out to develop an estimate explain the intended approach to the of the profitability of the business. interviewer at the outset. Using this estimate of its profitability,

A strong candidate would receive no further guidance. Where necessary, candidates would be prompted to address each of the following areas in turn to arrive at an estimate of the capital requirement. 76 London Business School Case Book

L.E.K. Consulting

NewCo Petrol Retailer

Question 1: What is the total market size for petrol retailing? This can be tackled either at an Alternatively the market size can be Additional points that could be individual or household level. At an tackled at the household level. Here mentioned to improve the market size individual level, an assumption would assumptions would need to be made estimate would include factoring any need to be made about how many around average number of people per taxation that is applied to fuel before of the 50m population own cars / household, proportion of households deriving the final value of the market drive and therefore purchase petrol. owning a car, and average petrol from the perspective of petrol retailers. An assumption would also need to expenditure per annum (perhaps In additional, the contribution from be made about their typical annual based on average mileage per annum ancillary revenues e.g. convenience expenditure, which could be based on and fuel economy). retail formats on the forecourt could assumed miles travelled, typical fuel also be considered. economy, and typical fuel price.

Example calculation:

• 20m households on the island (assuming 2.5 people on average per household)

• 80% of households are assumed to own cars

• Average annual mileage of 12k per household

• Annual expenditure of £2160 (12k miles @ 30 miles per gallon = 400 gallons x 4.5 litres per gallon = 1800 litres @ £1.20 per litre)

• Annual revenue net of tax c. £650 (assuming tax take of c. 70%)

• Ancillary revenue of £80 -- c. 40 refuels per annum (assuming average refuel size of c.45 litres per visit) -- average ancillary spend per visit of £2

• Total market value = c. £12bn (20m x 80% x (£650 + £80)

Question 2: What share of the market might you be able to get? The market size estimate can be divided by 1000 to obtain the average Example calculation: revenue per petrol outlet. In practice, however, the prime sites for locating • Market size = £12bn a petrol outlet are likely to have been taken already, and therefore some • Average revenue per station = £12m (market size / 1000 stations) downward adjustment to reflect this would be required to develop an • Potential revenue of proposed investment = £10m per annum (assuming estimate of the likely revenue for the declining revenue from new site locations) proposed new development. London Business School Case Book 77

L.E.K. Consulting

NewCo Petrol Retailer

Question 3: What are the economics of the business likely to look like? Having already estimated the revenue for the site, there are two possible Example calculation: approaches here. One would be to identify the various elements of • Typical operating margin = 5% fixed and variable costs and develop estimates for each of these. The • EBIT = £500k (£10m x 5%) second (simpler) approach is to consider typical operating margins for retail businesses, and assume this business would perform in line.

Question 4: What is the required rate of return? In market equilibrium, the return Having derived the implied investment achieved on an investment on an Example calculation: amount, it should be sense-checked incremental petrol station will be just to ensure it appears reasonable, and sufficient to meet the market rate of • Assumed pre-tax required prior assumptions revisited where return for this asset class. Having rate of return = 20% (the asset necessary. Strong candidates would calculated the EBIT for the outlet, this class would require a return consider which assumptions the final relationship can be used to derive the above the risk free rate, but is result is most sensitive to, and would implied total investment capital that potentially less risky than VC- pay particular attention to the degree would be necessary to maintain this style investments that typically of uncertainty around the values equilibrium state. require a target return of c. attributed to these items. 30-40%)

• Investment = £2.5m (= EBIT of £500k / 20%) 78 London Business School Case Book

Marakon

AirJet Inc. PROFIT

North America

Case Summary (for interviewer only) Overall, aircraft manufacturing is AirJet Inc. is losing money in the buy 15 or more planes. Lessors, in a profitable business, but market jet engine business. However, the purchasing large volumes of aircraft, economics vary depending on the average player in the jet engine have been able to exert significant business segment. AirJet participates aircraft market is profitable. AirJet buying power over our client and in two segments has gained significant market share achieve large price concessions. • jet engine, 80 to100-seat aircraft by aggressively serving the Lessor • propeller, 20 to 30-seat aircraft customer segment which tends to

Interviewer’s Discussion Guide

Step 1: Provide the candidate with the following problem statement:

• AirJet Inc. is a U.S. manufacturer volume increase year-over-year • AirJet’s senior management team of small, regional airplanes. It of 10% and 5%, respectively, and has hired a team of consultants to manufactures two types of aircraft: revenues of $794 million and $225 help the company develop a value- Jet engine (80 to100-seat) and million, respectively maximizing strategy. We need your propeller aircraft (20 to 30-seat) help to understand • Although overall AirJet turned —— What are the key issues and • In 2011, AirJet delivered 110 jet a profit, profitability varied opportunities at AirJet? engine aircraft and 150 propeller significantly by business —— What solutions would you aircraft. This represented a unit recommend to management?

Step 2: Structure the Problem

Encourage candidate to develop an approach to root cause the profitability issue. Provide the following information (either in full or as requested by the candidate)

Jet Engine Aircraft Business Propeller Aircraft Business 2011 Financials ($m) % of Sales Financials ($m) % of Sales Revenues 794 100% 225 100% COGS -659 -83% -86 -38% SG&A -99 -12% -16 -7% Delivery & Other -42 -5% -8 -4% Net Income -6 -1% 69 31% Capital Charge (at 10%) -25 -3% -3 -1% Economic Profit -31 -4% 66 29%

Economic Profit = Net Income – Charge for Cost Capital

[Note] Economic profit includes a charge that accounts for the required return on capital. When EP > 0 value is created, when EP < 0 value is destroyed (even if Net Income is positive!),and at EP = 0 the business generates exactly the required return London Business School Case Book 79

Marakon

AirJet Inc.

Using a typical profitability framework, the candidate should make the following observations

• The Jet Engine business is • The problem lies with the Jet • Jet engine parts are complex and unprofitable while the propeller Engine business typically bought from specialized business is highly profitable OEMs • Gross margins in the Jet Engine Additional information business are much lower than the • Costs and hence margins are in Propeller business line with market average

Step 3: Analyze the Jet Engine Regional Aircraft Business

The candidate should focus the rest of the discussion on the Jet Engines business and understanding market size, growth and profitability within the segment. Provide the following information (in full or as requested)

Market Structure and Economics

Overall Market Economics 2011, $m Total US Market Size 3,520 Average Costs per Aircraft $6.8 # of Jets Sold 440 Total Capital Invested 3,300 Cost of Capital 10%

Market Structure

500 440 deliveries

400 Competitor 4: 70 ’08 – ’11 CAGR 360 deliveries Competitor 4 6% Competitor 3: 70 300 Competitor 4: 58 Competitor 3 1%

Competitor 3: 68 Competitor 2: 92 Competitor 2 15% 200 Competitor 1 7%

# of Deliveries Competitor 2: 61 Competitor 1: 97 AirJet Inc. 15% 100 Competitor 1: 79 Total Market: 7% AirJet Inc.: 110 AirJet Inc.: 72 0 2008 2011 80 London Business School Case Book

Marakon

AirJet Inc.

Key insights

1 The market is profitable and growing with the average Good candidates would seek to explore the market growth. competitor generating 5% economic profit margins Additional information for discussion: —— Total Revenues = $3520 mn —— Revenue per aircraft = $3520/440 = $8mn The market is expected to continue growing at 7% for the —— Cost per Aircraft = $6.8m + 10 % of $3300mn Capital next 10 years due to: = $7.6mn a Changes in regulation (e.g. Open Skies) and —— Economic Profit per aircraft = $8 mn - $7.6 mn = $0.4 globalization (India, China) have lifted restrictions on mn U.S. based airlines to service these segments —— EP Margin = 0.4/8 = 5% b The current customer base for AirJet is largely US based 2 AirJet has the largest market share at 25% (was 20% 3 c Success of newer businesses such as Fractional Jet years back) Programs (time sharing of jets) 3 AirJet growing at ~15%, market growing at ~7% d Expected replacement cycles as older jets are retired 4 Four other competitors control the remaining market ranging from 16-22% 5 There is no dominant competitor in the jet engine business

Competitive Position

Once the candidate identifies that AirJet has gained market share over the last 3 years, he/she should explore the reasons for it. Information for supporting this discussion

1 AirJet is pricing its product lower than the market on b Performance: Range of ~500 miles which is similar to average. They can increase price by 20% and still have the market average a competitive product which provides a fair benefit to c Maintenance and Asset Life: The majority of customers the fragmented jet engine aircraft maintenance companies have the capabilities and parts to service 2 There doesn’t seem to be much differentiation versus AirJet’s aircraft products from competitors 3 Therefore, just increasing the price by 20% will put AirJet a Cockpit: Similar to industry standard, resulting in low in midst of the cluster. Without any offer advantage, AirJet switching costs for new customers will lose market share relative to its current position

AirJet’s Customers

Once the candidate identifies pricing disadvantage as the issue, direct the conversation to lead to customer segmentation at the root of the issue. Provide the candidate with the following information

Jet Engine Economics Jet Engine Customer Segments 2011, $m Per Aircraft1 Total 2011, $m Affluent Individuals Corporate Customers Lessors Fixed Cost $1.5 $165 AirJet Revenues $84 $320 $390 Variable Cost $6.0 $660 # Customers 10 13 4 Total Cost2 $7.5 $825 # Aircraft sold 10 40 60 Note Market share 12.50% 33% 25% 1 Per Aircraft costs based on 2011 volume of 110 planes 2 Total Cost includes Cost of Capital

Share the following information as requested by the candidate • Affluent Individuals: Buy 1 aircraft during a buying cycle (approximately every 5 to 15 years) • Corporate Customers: Buy 2-3 aircraft, mostly large multinationals for executive travels • Lessors: Buy 15 or more aircraft and lease to airlines, governments, corporations etc. London Business School Case Book 81

Marakon

AirJet Inc.

Key Insights (Drivers of Segment Profitability)

Ask the student to compute average price by customer segment

• The main driver of profitability • The Lessor segment makes • Lessors comprise the largest between segments is solely large purchases and exploits a customer segment [more than 50% price without doing any math, negotiating leverage over AirJet of the total market by volume] since operating cost per aircraft —— Segment 1: 80 planes, our produced and delivered is the • Average revenue per customer is: share 12.5% same regardless of the intended $390M/ 60 aircraft = $6.5M per —— Segment 2: 120 planes, our customer aircraft from Lessors, compared to share 33% $8.4M from Affluent Individuals and —— Segment 3: 240 planes, our $8.0M from Corporate Customers share 25%

Step 4: Generate Alternatives

Prompt the candidate to develop alternatives for solving the profitability issues. Some suggestions based on participation choices

1 Increase prices for Lessors: for 2 Exit the Lessors segment: Similar 3 Enter the leasing business: every $500K we lose 1 customer calculations show that the loss Forward integration. Also creates a (15 aircraft). After a few calculations of scale makes the other two threat for the Lessor customer and the candidate should see that segments unprofitable as well improve negotiating leverage with such elasticity this alternative (cannot cover fixed costs) cannot be profitable, e.g. 4 Other a Increase in Price to $7.0 mn, losing 1 customer b Total Aircrafts sold = 10 + 40 + 45 = 95 c Total Aircrafts Cost = 165 + 95 x 6 =$735 d Total Revenue = 84+320+ 7 x 45 = $719 e Profit (Loss) = ($16) mn [remains unprofitable at $7.5m and $8m – i.e. losing 2 or 3 customers] 82 London Business School Case Book

Marakon

AirJet Inc.

Discuss with the candidate possible pros and cons of each alternative. Specifically for Alternative 3 (enter the leasing business) the following information should indicate that it is a good opportunity that can help prop-up the Lessor segment as well

• Market Growth: The jet engine, • Market Economics: • Customer: AirJet has marketing regional aircraft leasing market is i The aircraft leasing market relationships with all aircraft end- large and growing. In 2011, the new is profitable with the average users who are leasing their aircraft aircraft leasing market represented competitor generating ROE’s of from the company’s aircraft lessor almost 50% of all new aircraft ~15% (cost of equity ~10%) customers. AirJet works with these delivered (with operating leases ii The key driver of profitability is end-users to help them configure comprising half) and is expected to cost of funds. AirJet would be the plane during the front end of grow 5% per year at parity the sales process

• Competition: Three aircraft lessors (also AirJet’s customers) dominate the market with a combined share of 65%

If time permits and the candidate has reached a satisfying solution for the profitability issue, use the rest of the time to brainstorm additional growth alternatives for the business. The following is a starter list

1 Other Markets: Jet Engine 2 Geographies – International 3 Understand the propeller business Segments – 50 to 80 seaters, 100+ Expansion to find avenues of growth segment 4 Enter Fractional Jet Ownership Market London Business School Case Book 83

McKinsey & Company

Market OldPharma ENTRY

Europe

Case Background This document is intended to help that the following case is a good The example below is set up to teach prepare you for the case portion of a example of the type of case many of you how to approach a typical case. McKinsey & Company interview. While our interviewers use. However, in most interviewers at McKinsey have a good interviews the interviewer will only ask deal of flexibility in creating the cases a selection of the questions in this they use in an interview, we believe case.

Context The interviewer will typically start the case by giving a brief overview of the context, ending with a question that is the problem definition. At the end of the description you will have an opportunity to ask any questions you might have to clarify the information that has been provided to you.

Let’s assume our client is OldPharma, Biological R&D is vastly different Should OldPharma acquire a major pharmaceutical company from small molecule R&D. To gain BioFuture? (pharmaco) with USD 10 billion these capabilities, pharmacos can a year in revenues. Its corporate build them from scratch, partner with headquarters and primary research existing startups, or acquire them. • Write down important and development (R&D) centers are in Since its competitors are already information Germany, with regional sales offices several years ahead of OldPharma, worldwide. OldPharma wants to jumpstart its • Feel free to ask interviewer for biologicals program by acquiring explanation of any point that is OldPharma has a long, successful BioFuture, a leading biologicals start- not clear to you tradition in researching, developing, up based in the San Francisco area. and selling “small molecule” drugs. BioFuture was founded 12 years ago This class of drugs represents the by several prominent scientists and vast majority of drugs today, including now employs 200 people. It is publicly aspirin and most blood-pressure or traded and at its current share price cholesterol medications. OldPharma the company is worth about USD 1 is interested in entering a new, rapidly billion in total. growing segment of drugs called “biologicals”. These are often proteins OldPharma has engaged McKinsey or other large, complex molecules that to evaluate the BioFuture acquisition can treat conditions not addressable and advise on its strategic fit with by traditional drugs. OldPharma’s biologicals strategy.

84 London Business School Case Book

McKinsey & Company

OldPharma

Questions

In McKinsey & Company case interviews, the interviewer will guide you through the case with a series of questions that will allow you to display a full range of problem solving skills. Below is a series of questions and potential answers that will give you an idea of what a typical case discussion might be like.

Question 1

What factors should the team consider when evaluating whether OldPharma should acquire BioFuture?

• Take time to organize your thoughts before answering. This tells the interviewer that you think about the problem in a logical way

• Develop overall approach before diving into details

A good answer would include the BioFuture’s marketing or sales OldPharma’s capability gaps following: capabilities. Especially how in biologicals, R&D, sales and Value of BioFuture’s drug pipeline. promotional messages will be marketing, etc. Number of drugs currently in delivered, e.g., relationships with key development. Quality of drugs opinion leaders that can promote OldPharma’s alternatives to this (likelihood of success). Potential biologicals; Key opinion leaders can acquisition. Alternative companies revenues and profits come from the academic arena, like OldPharma could acquire. Other prominent medical school professors, strategies for entering biological Biofuture’s R&D capabilities (future or from the public arena, like heads segment, e.g., enter partnerships drug pipeline). Scientific talent. of regulatory bodies or prominent rather than acquisition. Pursuing other Intellectual property (e.g., patents, telejournalists strategies than entering the biological proprietary processes or “know-how” segment. for biologicals research). Buildings, Acquisition price equipment and other items that allow Biofuture’s R&D to operate A very good answer might also include multiple additional key factors OldPharma should consider. For example: BioFuture’s existing partnerships or other relationships with pharmacos London Business School Case Book 85

McKinsey & Company

OldPharma

Question 2

The team wants to explore BioFuture’s current drug pipeline. The team decides to focus first on evaluating the value of BioFuture’s drug pipeline – both its current portfolio, as well as its ability to generate drugs on an ongoing basis. What issues should the team consider when evaluating the value of BioFuture’s existing drug pipeline?

Ensure to mention different issues instead of immediately diving very deep into one issue. Then ask your interviewer if he/she wants to go deeper on any of them.

A good answer would include the • Costs to manufacture and sell, e.g., • Side effects and potential legal following: marketing, distribution, etc. exposure, e.g., potential law suits Further cost of R&D until each drug due to unexpected side effects is ready to be sold. • Press about these drugs, e.g., have famous doctors called for this kind • Emergence of substitutes – are Potential value of selling each drug. of drug, is it only slightly improving competitors working on substitutes • Market size, e.g., size of patient on what is on the market already? already? Is it about speed and population, pricing does BioFuture have enough researchers working on the • Market share, e.g., number of A very good answer would also respective drugs? competitive drugs in R&D or on include the following: the market; different side effects, Risk level • Strength of underlying patents, i.e., convenient dosing schedule (i.e., • Likelihood clinical trials of a drug how likely is it that a competitor patients are prescribed to take a will prove effective can successfully copy BioFuture’s drug at regular intervals that are drug? easy to remember such as once a • Likelihood drug will win regulatory day or every 12 hours), etc. approval

Question 3

Below is a description of expected probability of success, by stage, in the Pharma R&D pipeline.

Note: “Filing” is the process of submitting all of the clinical and safety evidence from Phase I, II, and III trials, and asking for regulatory approval to actually sell the drug.

Exhibit 1 Fictitious exhibit

Expected probability of success, by stage of research and development Percent

70% 40% 50% 90% Successful Phase I Phase II Phase III Candidate drugs Filing marketing trial trial trial and sales

30% 60% 50% 10% Fail Fail Fail Fail 86 London Business School Case Book

McKinsey & Company

OldPharma

OldPharma believes that the likelihood of success of BioFuture’s primary drug candidate can be improved by investing an additional USD 150 million in a larger Phase II trial. The hope is that this investment would raise the success rate in Phase II, meaning that more candidate drugs successfully make it to Phase III and beyond. By how much would the Phase II success rate need to increase in order for this investment to breakeven?

The interviewer would tell you to assume that if the drug is successfully marketed and sold, it would be worth USD 1.2 billion (i.e., the present value of all future profits from selling the drug is USD 1.2 billion).

• Ask for clarification of information if necessary • Take notes of the numbers • Take time to plan out how to approach the calculation • Describe your approach and talk the interviewer through your calculation

A very good answer would include • To breakeven, i.e. to make the Phase II probability would have to the following: $150 million investment worth increase from 40% to 80% Investment would need to increase while, value of the candidate (70% x 80% = 56%) probability of success in Phase II drug that passes Phase II would from 40% to 80% (increase of 40 need to increase to $540 million • This seems like a very big percentage points). There are multiple + $150 million = $690 million. This challenge as an increase by 40 ways to approach this calculation. One means, the probability of combined percentage points means that the method is shown here: success in Phase I and II would current probability of 40% needs • If a candidate drug passes Phase need to increase by (150/540) = 28 to double II, then it has a 50% x 90% = 45% percentage points chance of being successfully marketed and sold. Since a • So the current probability of successful candidate drug is worth Phase I and II, i.e., 70% x 40% $1.2 billion, a candidate drug that = 28% would have to increase passes Phase II is worth 45% x by 28 percentage points, i.e., to $1.2 billion = $540 million 56%. In order to come up to 56%,

Question 4

Next, the team explores the potential setup with BioFuture after the acquisition. Although BioFuture’s existing drug pipeline is relatively limited, OldPharma is highly interested in its ability to serve as a biological research “engine” that, when combined with OldPharma’s existing R&D assets, will produce many candidate drugs over the next 10 years. What are your hypotheses on the major risks of integrating the R&D functions of BioFuture and OldPharma?

A very good answer would include • Language barriers severely hinder • Key scientific talent leaving the following: communication and sharing of BioFuture after the acquisition – • Scientists do not have overlapping information either because acquisition makes disease (therapeutic area) interests them independently wealthy or or expertise and are unable to • Poor management and sense of because they don’t want to be a materially collaborate community as a result of R&D part of the new big OldPharma operations that might come with a pharmaco • Integration into the process- time difference of 9 hours driven OldPharma culture kills the entrepreneurial culture at BioFuture that has been key to its success London Business School Case Book 87

McKinsey & Company

OldPharma

Question 5

Post-acquisition, OldPharma believes that it will be necessary to consolidate all biologicals R&D into one center. There are two logical choices: OldPharma’s existing headquarters in Germany, and Biofuture’s current headquarters in San Francisco. OldPharma does not have any current biologicals facilities or operations in Germany, so new facilities would have to be built. How would you think about this decision?

A very good answer would include • Overall easier to integrate • Easier to retain the entrepreneurial the following: BioFuture’s R&D capabilities into spirit and culture of BioFuture Reasons for consolidating at OldPharma OldPharma’s corporate HQ in • No need to rebuild e.g. Germany. Reasons for consolidating in manufacturing plants, research • Better coordination with non- BioFuture’s San Francisco location. facilities biologicals R&D at OldPharma • Less likely to see flight of talent: many top scientists would likely • Better coordination with other leave rather than relocate to business units of OldPharma (e.g., Germany marketing, manufacturing) • Easier to recruit and find top • Easier to intermix scientists in research talent in San Francisco biologicals and traditional R&D vs Germany units, and transfer any unique capabilities & knowledge

Question 6

While researching the integration barriers, the team learns that one of OldPharma’s top competitors, DrugMax, has already partnered with BioFuture on their lead drug candidate essentially agreeing to split all development costs and future profits 50/50. OldPharma is considering buying out DrugMax’s 50% share of the BioFuture lead drug candidate. As a first step in valuation, they have asked the McKinsey team to estimate the potential peak sales of this drug candidate – this is another way to verify potential future profits of a drug. The drug candidate is intended to treat non-Hodgkin’s lymphoma. New cases are diagnosed each year in 25 out of every 100,000 U.S. men and 15 out of every 100,000 U.S. women. Given this and any other information you might need, what are the estimated U.S. peak sales of this compound?

The following information will be given to you by the interviewer upon request: • U.S. population is 300 million, half men, half women. • Full course of therapy takes 90 days and OldPharma believes the drug can be sold at a price of $500 per day. • Estimated market share (i.e., % of eligible patients who are treated with this drug), is 25%.

A very good answer would include • Each course of therapy will yield the following: $45,000 in revenue (90 days at • Expected peak sales of this drug $500 per day). Therefore total U.S. candidate are USD $675 million market potential is $2.7 billion. Estimated market capture is 25%, • Assuming a U.S. population of 150 leading to an estimated U.S. peak million men and 150 million women, sales of $675 million. there would be 37,500 estimated diagnoses among men, and 22,500 diagnoses among women, or 60,000 new cases of non- Hodgkin’s lymphoma per year 88 London Business School Case Book

McKinsey & Company

OldPharma

Question 7

On the third day of the engagement you run into the Vice President of Business Development for OldPharma in the cafeteria. He asks what the team’s current perspective is on the BioFuture acquisition and what next steps you are planning to take. How would you respond?

There is no right or wrong answer on in Phase II trials is not likely to be a OldPharma. There are significant risks whether to buy or not buy and there profitable investment; secondly, one of to this as well, given the “two worlds” are various ways on how to build an your competitors, DrugMax, currently nature of their organizational cultures. argumentation. One possible very has a cooperation with BioFuture for good answer would be: its lead drug candidate. This needs to As next steps we therefore want to An acquisition of BioFuture can be taken into account when trying to better understand the feasibility of bring two major sources of value to acquire BioFuture. We are still looking bridging the cultural gap and better OldPharma: the value of its existing into other potential synergies, but it understand pros and cons of different compounds and the potential value of appears unlikely that OldPharma can consolidation options; estimate the integrating its research capabilities into justify the cost of an acquisition purely cost of this research integration; get OldPharma based on BioFuture’s existing pipeline a better understanding of the value of BioFuture’s future potential to develop In terms of BioFuture’s existing pipeline The greater source of upside is likely to drugs there are a couple of challenges: firstly, be the long-term benefits of integrating the proposed idea of investing heavily BioFuture’s research capabilities with London Business School Case Book 89

McKinsey & Company New product RefreshNow! Soda launch North America

Case Background This document is intended to help believe that the following case is a good The example below is set up to teach prepare you for the case portion of example of the type of case many of you how to approach a typical case. a McKinsey & Company interview. our interviewers use. However, in most While interviewers at McKinsey have interviews the interviewer will only ask a a good deal of flexibility in creating selection of the questions in this case. the cases they use in an interview, we

Our client is RefreshNow! Soda. RefreshNow! is evaluating the RefreshNow! is a top 3 beverage launch of a new product, a flavored • Write down important producer in the U.S. and has non-sparkling bottled water called information approached McKinsey for help in O-Natura. The company expects this designing a product launch strategy. new beverage to capitalize on the • Feel free to ask interviewer for recent trend towards health-conscious explanation of any point that is As an integrated beverage company, alternatives in the packaged goods not clear to you RefreshNow! leads its own brand market. design, marketing and sales efforts. In addition, the company owns the RefreshNow!’s Vice President of entire beverage supply chain, including Marketing has asked McKinsey to help production of concentrates, bottling analyze the major factors surrounding and packaging, and distribution the launch of O-Natura and its own to retail outlets. RefreshNow! has internal capabilities to support the a considerable number of brands effort. across carbonated and non- carbonated drinks, 5 large bottling Which factors should RefreshNow! plants throughout the country and consider and act on before launching distribution agreements with most O-Natura into the U.S. beverage major retailers. market? 90 London Business School Case Book

McKinsey & Company

RefreshNow! Soda

Questions

Question 1

What key factors should RefreshNow! consider in deciding whether or not to launch O-Natura?

• Take time to organize your thoughts before answering. This tells the interviewer that you think about the problem in a logical way

• Develop overall approach before diving into details

A good answer would include the Competitors. Which products is packaging, or distribution? Is it following: O-Natura going to compete with? possible to accommodate O-Natura Consumers. Who drinks flavored Which companies are key players and in the current production and water? Are there specific market how will they react? distribution facilities? What impact segments to address? does geography have on the plant A very good answer might also selection? Cost/Price. Is the flavored bottled include multiple additional key water market more profitable than factors RefreshNow! should Channels. What is the ideal those markets for RefreshNow!’s consider. For example: distribution channel for this product? current products? Is it possible to Capabilities and Capacity. Are current retail outlets willing to add profitably sell (price set by the market, Are the required marketing and O-Natura to their product catalogue? internal production costs) O-Natura? sales capabilities available within Given fixed costs involved, what would RefreshNow!? Does the product be the break-even point for O-Natura? require specialized production, London Business School Case Book 91

McKinsey & Company

RefreshNow! Soda

Question 2

After reviewing the key factors RefreshNow! should consider in deciding whether to launch O-Natura, your team wants to understand the beverage market and consumer preferences to gauge potential success of O-Natura.

The bottled market splits into non-sparkling, sparkling, and imports. Flavored water falls within non-sparkling. Your team has gathered the following information on the U.S. bottled water market. The information shows an estimate for the share of flavored water, as well as the current share for the two main products: Cool and O2Flavor.

Exhibit 1 Fictitious exhibit U.S. Bottled water market Millions of gallons

Non-sparkling Flavoured (by product) 100% = 8,000

Cool 20%

Non-Flavoured 95% 5% Flavoured 10% 02Flavour

70% Other

Based on the target price and upfront • In order to launch O-Natura, • The VP of Operations estimates fixed costs, what share of the flavored RefreshNow! would need to incur that each bottle would cost $1.90 non-sparkling bottled water would $40 million as total fixed costs, to produce and deliver in the newly O-Natura need to capture in order to including marketing expenses as established process. break even? Here is some additional well as increased costs across information for you to consider as you the production and distribution form your response: network • O-Natura would launch in a 16 oz. presentation (1/8 of a gallon) with a price of $2.00 to retailers

• Ask for clarification of information if necessary

• Take notes of the numbers

• Take time to plan out how to approach the calculation

• Describe your approach and talk the interviewer through your calculation. The more you talk the easier it will be for your interviewer to help you 92 London Business School Case Book

McKinsey & Company

RefreshNow! Soda

A very good answer would include 1 O-Natura would need to sell 400 2 O-Natura would need to capture a the following: million units in order to break 12.5% market share: O-Natura would need to capture a even: —— Non-sparkling flavored bottled 12.5% market share of flavored non- —— Variable profit per unit = water market = 5% x 8,000 sparkling bottled water in order to $2.00 – $1.90 = $0.10 million gallons = 400 million break even. Therefore, O-Natura would gallons need to be the Number 2 product in —— Break even units = Total fixed the market: costs / Variable profit per unit —— O-Natura sales in millions of = $40 million / $0.10 per unit = gallons = 400 million units / 8 400 million units units per gallon = 50 million gallons

—— Market share = 50 million gallons / 400 million gallons = 12.5%.

Question 3

RefreshNow! executives believe that the company’s position as the top 3 beverage company in the country gives them strategic strengths toward achieving the desired market share. However, they ask the team to characterize realistically what they would need to achieve that target.

What would RefreshNow! need to ensure realistically to gain the required market share for O-Natura (12.5% of non-sparkling flavored bottled water)?

A very good answer would include Strong Branding/Marketing. Create Operational Capabilities. Ensure the following: a successful introductory marketing access to preferred distribution Match with Consumer Preferences. campaign, including advertising, channels. Ensure sales force Ensure product image, attributes, pricing, and bundling promotions. capabilties to sell the new product. and quality fulfill the needs of all Leverage top 3 producer status and Ensure production ramp-up that allows consumers or niche segment, reaching limited market fragmentation in order response to increased demand. desired market share. Ensure target to position O-Natura brand within top price is consistent with other products 3 in the market segment. Anticipate in the market and the consumer’s response from competitors (e.g., expectations advertising, pricing, distribution agreements). Ensure product positioning does not cannibalize on other, more profitable, RefreshNow! products. (Note: In marketing, the decreased demand for an existing product that occurs when its vendor releases a new or similar product is called “cannibalization”. It is not important for you to use this business terminiology.) London Business School Case Book 93

McKinsey & Company

RefreshNow! Soda

Question 4

Within the key drivers for market share, RefreshNow! wants to know which to tackle first and what the strategy should be. Therefore McKinsey helped RefreshNow! design and run a study to understand branding and distribution. The following information shows results from the study, based on a sample of target consumers. What can you conclude from the study in regards to the preferred marketing image and strategy of O-Natura?

Exhibit 2 Fictitious exhibit Consumer Preferences In percent

I identify product X with... I would buy beverage X in...

Cool O2Flavour Other 10 Healthy non-alcholic 50 20 30 Other 30 10 beverage

20 Café / restaurant 10

Sports drink 20 10 70 Convenience store 30

Leisure beverage 20 70 10 Supermarket 30

Flavoured water Other beverages (e.g., other RefreshNow! Products)

A very good answer would include Distribution differs from Marketing message to emphasize the following insights: current outlets and needs new identity and availability. Marketing Branding should emphasize sports agreements/research. Major shifts campaign should be built around the drink identity. “Healthy” identity is compared to current distribution currently unaddressed market need dominated by Cool product, “Leisure” model required in “Supermarkets”, for sports drink in order to connect by O2Flavor and “Sports” fragmented “Other”, and “Convenience stores”. with customers in that segment. in other products. Clear niche within Agreements with major retail players Given required changes in distribution “Sports” identity, with top 2 brands may accommodate for product channels, O-Natura messaging should currently occupying only 30% of share introduction, with RefreshNow! clarify new distribution strategy. of mind. Sports branding should also managing mix across channels. determine thinking around the sales “Other” channels need further channels (e.g., sales during sports research, since they are a major events or at sports facilities) component of the Flavored water segment 94 London Business School Case Book

McKinsey & Company

RefreshNow! Soda

Question 5

The team now explores RefreshNow!’s internal operational capacity to fulfill the projected O-Natura demand. RefreshNow! has decided to produce O-Natura from an existing dedicated production line in a single facility. In order to be on the safe side in case of increased demand they plan for an annual capacity of 420 million bottles (units) of O-Natura. The production line they have in mind currently operates for 20 hours per day, 7 days a week and 50 weeks per year. The speed for the current bottling process is 750 units per minute.

Is the current production capacity sufficient to fulfill the desired annual production plan of 420 million bottles of O-Natura?

A very good answer would include • Daily production = 750 bottles per • Annual production = 6.3 million the following: minute x 60 minutes per hour x 20 bottles per week x 50 weeks per RefreshNow! Would need to increase hours per day = 0.9 million bottles year = 315 million bottles its capacity because it would currently only allow to produce 315 million • Weekly production = 0.9 million bottles of O-Natura: bottles per day x 7 days per week = 6.3 million bottles

Question 6

Given the need for a specialized production process for O-Natura, the company has decided to add a new production line to only one of their 5 facilities. What factors should they consider in selecting the adequate plant?

A good answer would include A very good answer would include economic factors like: both economic and non-economic Economic factors. factors, and provide examples of • Required investment in target plant how different conditions could shift consistent with O-Natura budget decision: Non-economic factors • Match of selected plant cost • Availability of additional resources, structure with fixed and variable for example: cost targets for product —— Space —— Water • Product assignment matches —— Material supplies (e.g., bottle network growth targets (i.e., caps, labels) expected growth due to O-Natura —— Local labor pool is consistent with planned growth —— Management bandwidth for the plant) —— Skills and training needs due to specialized process • Speed of installation given current —— Commitments to and support plant commitments from selected plant community

• Adequate location for overall logistics; if only one plant concentrates on production, national shipments should be optimized London Business School Case Book 95

McKinsey & Company

RefreshNow! Soda

Question 7

The RefreshNow! CEO has seen the team’s analysis and confirms that the decision to launch O-Natura has been made. The product will be marketed as a sports drink, produced in the Midwest US, and distributed through supermarkets, convenience stores, and sport outlets. He asks the team what the company should start doing tomorrow?

Ensure to mention different insights instead of immediately diving very deep into one insight. Then ask your interviewer if he/she wants to go deeper on any of them

A very good response would include Marketing to start designing launch Sales to start designing product the following: strategy. approach and training for Finance to allocate required • Design product identity, message, Associates. resources for launch. packaging, etc. • Collaborate with marketing in • Communicate launch decision and defining message for retail outlets timeline to Finance department • Create advertising and promotional and consumers campaign • Analyze upfront investment and • Design distribution strategy and ongoing profitability targets • Define any channel-specific allocate resources for new product considerations (e.g., displays, • Secure resources required for alternative campaigns) • Design and deliver product training initial investment and allocate to for sales each department (e.g., Marketing, • Prepare product communications Sales, Production, Distribution) for investors, customers, and • Communicate new product consumers characteristics and targets to clients (e.g., supermarkets, Operations to begin product convenience stores, restaurants, testing, production line design, and sport clubs). logistics. • Create and test product

• Communicate and negotiate product characteristics and prices with suppliers

• Renegotiate supplier contracts for materials and water supply if necessary

• Increase capacity of the existing production line (maybe building a new one)

• Hire new people if needed 96 London Business School Case Book

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Footloose PROFIT

Europe

Footloose: Introduction Duraflex is a German footwear Together, these four brands represent on-the-job purposes. Casual boots is company with annual men’s footwear approximately 72% of the 5.0 billion € the fastest growing sub-category, and sales of approximately 1.0 billion German men’s boot market. The boots is geared more towards white collar Euro(€). category includes four main sub- workers2 and students who purchase categories: these boots for week-end / casual They have always relied on the boot wear and light work purposes. market for the majority of their volume Work boots, casual boots, field and and in this market they compete with hunting boots, and winter boots. Work The four key competitors in the market three other major competitors. boots is the largest sub-category and are Badger, Duraflex, Steeler, and is geared to blue collar workers1 who Trekker. purchase these boots primarily for

Competitor Profiles Badger and Steeler are both well established as work boot companies, Market Share of Work and Casual Boots by Company having a long history and strong brand recognition and credibility among blue collar workers. At the other extreme is 43% Trekker, a strong player in the casual Badger 11% boot market but a very weak player in work boots. Duraflex, however, is a 16% cross between the other competitors, Duraflex having a significant share in both work 40% boots and casual boots. 19% Steeler Historically Duraflex had an even 4% stronger position in the work boot sector. However, since 1996 when 5% Trekker the company began selling casual 34% shoes and focusing on the growth opportunity in casual boots, sales 17% Other of the Duraflex work boot line have 11% steadily declined. Also, around the same time Duraflex shifted its 0 10 20 30 40 50% emphasis, Badger became a much Market Share more assertive competitor in the work boot market, increasing its market Work boots Casual boots share to 43% in just three years.

1 Blue collar workers: wage earners who generally work in manual or industrial labour and often require special work clothes or protective clothing, which are replaced approximately every 6 months 2 White collar workers: salaried employees who perform knowledge work, such as those in professional, managerial or administrative positions London Business School Case Book 97

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Consultants’ Role & Data Collected In the fall of 1998, Badger launched a In January of 1999 Duraflex hired a telephone survey that was conducted new line of aggressively priced work leading consulting firm to conduct among 500 randomly dialed boots. The strong success of this line research to help management in its consumers across the country’s has caused Duraflex’s management decision making. To make an informed 6 primary regions. In addition, to re-evaluate their position in recommendation, the consultants the consultants completed some work boots. With limited additional realised they needed to collect internal cost and pricing analysis for resources, management must now information that would enable them to Duraflex’s work and casual boot lines. decide if they should focus their efforts size the market and better understand The market pricing analysis showed on competing with Badger in the work Duraflex’s competitive position. Duraflex competing at the premium boot sector, or focus their resources end of the market for both its casual on further strengthening their position To begin with, the consultants and work boot lines. with casual boots. developed a 20 minute quantitative

Exhibit One – Propensity to buy boots by population segment (Male Population 12+)

80% Bought work boots in past year 70 Bought casual boots in past year 60 60% 55%

40 35%

30 25%

20 20% 15%

0 Blue Collar White Collar Student

Population 11.0 MM 12.0 MM 7.0 MM Average Price Paid for Boots 140€ 130€ 110€ 98 London Business School Case Book

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Footloose

Exhibit Two – Channel Preference by Brand

100% 16% 21% 21% 26% Other Other Other Other 80 6% 14% 13% Athletic Store Apparel Store Dept. Store 11% Sporting Goods 16% 60 15% 35% 13% Dept. Store Discount / Outlet Shoe Store Discount / Outlet

40 23% 22% Athletic Store Safety / Work Channel Share (%) 54% Shoe Store 20 39% 28% Safety / Work 28% Shoe Store Shoe Store

0 Duraflex Badger Steeler Trekker

Exhibit Three – Buyer Purchase Criteria by Brand

Duraflex Badger Steeler Trekker

Quality / Styling 45% 45% Comfort 52% Comfort 45% Durability

Quality / Quality / 37% 39% 43% Durability Comfort Durability Styling 41%

Past Comfort 19% 30% Styling 22% Price 35% Experience

Brand 18% Styling 17% Features 19% Brand 21%

Past Features 10% Brand 13% Price 15% Experience 13%

0 20 40 60% 0 20 40 60% 0 20 40 60% 0 20 40 60% Share (%) Share (%) Share (%) Share (%) London Business School Case Book 99

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Exhibit Four – Retail price of selected boots, split by price component

180(€) 170 euros 160 Company Margin 22% 140 euros 140

120 euros Retailer Margin 8% Company Margin 16% 120 Company Margin 15% General & Admin. 10% Retailer Margin 6% 100 General & Admin. 11% Retailer Margin 12% Design 13% Design 10% 80 General & Admin. 10% Sales & Mktg. 9% Sales & Mktg. 6%

Retail price (€) Design 21% 60 Labour 19% Labour 17% 40 Sales & Mktg. 15%

Labour 12% Materials 32% 20 Materials 21% Materials 15% 0 Duraflex – Casual Duraflex – Work Badger

Case Study Questions

Work through these questions on your own, using the text and exhibits in the preceding pages. An answer key is provided in the pages that follow…

Question 1

How big is the work boot market (expressed in euros)? Does Duraflex get more of its revenue from work boots or casual boots?

Question 2

Explain why Badger is outperforming Duraflex in the work boot market.

Question 3

What changes would you recommend to Duraflex’s work boot strategy? Why? Would you recommend they introduce a sub- branded boot line? 100 London Business School Case Book

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Answer Q1: How big is the work boot market (expressed in euros)? Does Duraflex get more of its revenue from work boots or casual boots?

To find the size of the market, we can use the following equation:

(Average Boots Price) x (% of male population that bought work boots in past year) x (total population for the segment) x (number of pairs bought in a year)

Exhibit One gives us the populations for each segment and the percentages that bought boots. We therefore need to find the number of boots sold and the average price of each pair. For this question, the candidate will need to make some assumptions.

1 Average number of boots purchased per user 2 Average price per pair of boots • For work boots, we know that blue collar workers Work boots cost more (compare Blue Collar vs. Student) so purchase an average of 2 pairs per year (from the average price should be higher than 140 € for all (150 € Introduction, Footnote1) is reasonable); casual should be lower than student (100-110 € is reasonable). • White collar workers and students who buy work boots probably use less rigorously and less frequently, therefore probably only 1 pair per year

• For casual boots, we can make a reasonable assumption, knowing that casual boots are purchased primarily for weekends and light wear (from text) so the average number of pairs should be no more than work boots from Exhibit 1 (i.e. 1 pair per year)

The total market value will then be the sum, for each segment, of the following equation:

(Average Boots Price) x (% of male population that bought work boots in past year) x (total population for the segment) x (number of pairs bought in a year)

(€150 x 60% x 11Mill x 2) + (€150 x 25% x 12 Mill x 1) + (€ 150 x 15% x 7 Mill x 1) = €2,587.5 Mill or €2.6 Bill

The following table shows another way to see it:

# Pairs % Buying Work work boots Population Boots bought / year Price Per Pair (€) Segment Size (€) Blue Collar 11.0 Million 60% 2 150 2.0 Billion White Collar 12.0 Million 25% 1 150 450 Million Student 7.0 Million 15% 1 150 155 Million Total 2.6 Billion London Business School Case Book 101

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Following the same procedure the casual boot market is then:

(Average Boots Price) x (% of male population that bought work boots in past year) x (total population for the segment) x (number of pairs bought in a year)

(€100 x 20% x 11Mill x 1) + (€100 x 35% x 12 Mill * 1) + (€ 100 x 55% x 7 Mill x 1) = €1,025 Mill or €1.0 Bill

Or: # Pairs % Buying Work work boots Population Boots bought / year Price Per Pair (€) Segment Size (€) Blue Collar 11.0 Million 20% 1 100 220 Million White Collar 12.0 Million 35% 1 100 420 Million Student 7.0 Million 55% 1 100 385 Million Total 1.0 Billion

Summary

• We know from Exhibit 1 that Duraflex has a 16% share of the work boot market and 40% of the casual boot market, therefore: —— Duraflex’s revenue from the work boot market = 16% x 2.6 Bill = 416 Mill —— Duraflex’s revenue from the casual boot market = 40% x 1.0 Bill = 400 Mil

• So Duraflex gets most of its revenue from work boots, even though the revenues are almost evenly split

Our Answer: The work boot market is 2.6 Billion €. The casual boot market is 1.0 billion €. Duraflex generates 416 Million € from work and 400 Million € from casual. Depending on assumptions, casual may be slightly larger but the two should be relatively close. 102 London Business School Case Book

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Answer Q2: Explain why Badger is outperforming Duraflex in the work boot market.

Ways to approach the question

According to the data we have, and what we know as industry dynamics, the analysis can be split in 4 main areas that would demand further study:

• Distribution

• Buyer Purchase Criteria by Brand (BPCs)

• Pricing

• Cost analysis

Even if you have many good ideas to answer this question, you won’t be impressive without STRUCTURE. You don’t need a formal framework, just be methodical and organised in your approach – and summarise at the end!

Distribution Buyer Purchase Criteria by Pricing Brand (BPCs) Duraflex is not sold where work boots We know that Badger is launching an are being purchased. Exhibit 2 shows Exhibit 3 shows us that Badger’s top “aggressively priced” work boot line. that Badger’s and Steeler’s boots two associated criteria are: “Quality / Duraflex can alter its pricing strategy, are often purchased in safety / work Durability” (45%) and “Comfort” (39%). e.g. lower its own boot price channels, whereas Duraflex does not The same holds true for Steeler. Thus, • However, looking at Exhibit 3, have a significant presence in them these seem to be critical criteria for among the stronger work boot work boot market market competitors, we see that • However, Duraflex’s top criteria only Steeler shows price as a top Therefore, Duraflex will need to are “Styling” (45%) and “Quality BPC (and then it is the lowest one) broaden distribution if it is to / Durability” (37%), with Comfort – potentially because they are the increase its share; it needs to is a distant 3rd at 19%, far from its lower cost option is this market get shelf space in the relevant competitors figures channels Given that price does not appear Duraflex is not meeting the key to be an important criteria for work needs of blue collar workers boot consumers, Duraflex will likely and will need to strengthen its not realise great benefits from this “comfort” perception strategy, and will also lower its profits in so doing

Additionally, we should note that Badger has built up a loyal customer base: “past experience” as a criteria We know from the case that represents 30% and is 3rd on its list of Duraflex has premium price associated criteria positioning, hence lowering its price may lead to perception of lowering quality London Business School Case Book 103

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Cost Analysis

Comparing Badger to Duraflex work • Sales & Marketing spend is lower boots, from Exhibit 4, there is one key for Badger – potentially driven by Badger has lower margins (both area where Badger proportionately lower marketing requirements in absolute and relative); given and absolutely spends more than safety / work channel as well as already higher market price, Duraflex: “materials”. This supports established brand name among Duraflex has limited flexibility to their perception of “quality / durability” blue collar workers; Also, Badger raise its boot prices; Duraflex and “comfort” among their consumers. has built a loyal customer base, may lower its margin somewhat Also, they spend more on “labour” and it is less costly to maintain and shift emphasis to labour and • Retailer margin is lower for Badger existing customers than attract materials – due to significant presence in new ones safety / work channel

Summary

• Duraflex is not sold where work boots are being purchased

• Duraflex is not meeting the key needs of blue collar workers, as it is weaker than competitors on the critical ‘Comfort’ dimension

• Badger prices its boots more competitively, which is likely to be particularly appealing to the large work boot market; this has helped develop a large and loyal consumer base

• Badger has lower retailer margins (both absolute and relative) and spends less on Sales & Marketing

Answer Q3: What changes would you recommend to Duraflex’s work boot strategy? Why? Would you recommend they introduce a sub-branded boot line?

There are two reasonable answers to this question. The company can either:

• Focus on increasing its work boots activities, or

• Emphasize casual boots

Each option has its own justifications and implications.

The important thing with a subjective question is not what you answer to the question, but how you answer the question – pick a point of view and support it with critical reasoning! 104 London Business School Case Book

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Increased Work Boot Market Focus

Justification: Implications:

• Represents approximately 40% of Duraflex’s business • Enter safety / work channel – we may be faced with (from question 1), making it very difficult to profitably pressure from Badger exerting influence on retailers in ignore this market this channel

• While Duraflex does have greater market share in the • Build “comfort” and “quality / durability” perception casual boot market, we know from information given in among blue collar workers the case that the casual boot market is smaller in size than the work boot market, which may indicate less • Increase proportion of costs allocated to materials and opportunity for share growth; also, we derive lower labour – potentially reducing company margin margins (15% vs. 21%) from casual boots (from Exhibit 4) • There may be unique / niche positionings for Duraflex • Given that Badger is introducing a new work line, they (suggestions should be well thought out) may see new growth potential in the market which Duraflex may also want to capitalise on • Introduce sub-brand or increase promotion of brand with a focus on blue collar workers: may include on- • Building a stronger image among blue collar workers site promotions, advertising in industry publications, may entice them to try other Duraflex footwear products or advertising in magazines / on television during programmes with a higher blue collar readership / viewership

Emphasise Casual Boots

Justification: Implications:

• Stronghold for Duraflex right now (40% market share) • Unlikely to be a strong competitor reaction, since Duraflex is already dominant player • Fastest growing market • Duraflex will not need to enter new distribution channels • Represents approximately 40% of Duraflex’s business (from question 1), making it very difficult to profitably • Candidate should discuss a strategy for work boot ignore this market market – either winding down, maintenance etc. and implications of this • Focusing additional resources on work boot market would risk of alienating casual boot buyers (white collar workers and students)

• “Style” is the top BPC for Duraflex (from Exhibit 3). From the statistics on Badger and Steeler, we know this is likely not an important criteria for the work boot market. By focusing on the casual boot market Duraflex can devote additional resources to keeping up with styles to better appeal to this target 106 London Business School Case Book

Roland Berger Strategy Consultants

Mobile Phone Company (MPC) – Market Share Gain PROFIT

Europe

Case Background MPC is a global mobile phone handset manufacturer that has seen its market share in Europe (by value) slip from 20% five years ago to 1% today. MPC has discussed its ambition to become relevant in Europe again and has set itself a stretch target to get back to its previous market share position. The European handset market has traditionally been dominated by two players but the last few years has witnessed new entrants from the far East.

Question What volume does MPC need Information to be provided as a Suggested approach: to regain its past market share response to candidate questions: 1 Assess the size of market in five position and what key challenges • Assess only the five key markets of key countries by volume and value does it face in getting there? UK, Germany, France, Spain and 2 Assess what MPC needs to Italy (populations of 60m, 80m, achieve to reach its goal by volume 65m, 45m, 60m) and value • European mobile market is 3 Discuss the key challenges that dominated by four key operators ABC needs to overcome that handset manufacturers sell to (Vodafone, Orange, Telefonica/O2, T-Mobile) • Handsets are split into two tiers – smartphones and feature phones • Smartphone penetration rate across 5 key markets should be assumed to be 35%

Step 1: Size of the market Start with confirming the expectations Develop first key assumption of the Key step – candidate should on splitting the market – i.e. 5 key mobile penetration rate. The candidate discuss the rate at which handsets markets (e.g. UK, France, Germany, should come up with one rate across in circulation will be replaced by Spain and Italy), expectations of Europe for calculation purposes but consumers. They should quickly assumptions between different should discuss that this would not be identify that the replacement rate for markets, only two tiers of handset the case in reality (the candidate might smartphones and feature phones are types: standard handsets and wish to give some indication of how different. From this, the candidate smartphones. they think this might differ by market). should develop assumptions for the two replacement rates. Calculation – candidate should apply Interviewer: From the population mobile penetration rate to the market Calculation – candidate should use across the five key markets – populations to give the number of the replacement assumptions to expect the candidate to do this on handsets in circulation. calculate the number of smartphones an aggregated basis, but if they and feature phones sold in one year start doing it for each of the five At this point the candidate should (market volume) and follow this on with markets then let them continue. bring in the smartphone penetration an assumption on the value per unit and calculate that number of (smartphone and feature phone) to smartphones vs. feature phones in give the market value. circulation. London Business School Case Book 107

Roland Berger Strategy Consultants

Mobile Phone Company (MPC) – Market Share Gain

Step 2: MPC ambitions This is a relatively simple calculation to assess what MPC’s market ambitions translate to in terms of value and volume from 1% to 20% market share.

The main task will come in the next section where the candidate will need to demonstrate the ability to rationalise what this ambition means for MPC.

Example calculation:

UK Ger Fr Sp It Total T5 Population 60 80 65 40 60 305 Data provided Ratio of Mobile penetration 1.25 1.25 1.25 1.25 1.25 Assumptions from candidate Mobiles in circulation 75 100 81 50 75 381 Calculation required Smartphone % 35% 35% 35% 35% 35% Data provided Smartphone [mn phones] 26 35 28 18 26 133 Calculation required Feature phones [mn phones] 49 65 53 33 49 248 Calculation required Smartphones replacement rate [yrs] 2 2 2 2 2 Assumptions from candidate Feature phone replacement rate [yrs] 3 3 3 3 3 Assumptions from candidate Smartphones sold in a year [mn phones] 13 18 14 9 13 67 Calculation required Feature phones sold in a year [mn phones] 16 22 18 11 16 83 Calculation required Value of average smartphone [EUR] 300 300 300 300 300 Assumptions from candidate Value of average feature phone [EUR] 100 100 100 100 100 Assumptions from candidate Market value [EUR bn] 5.6 7.4 6 3.7 5.6 28.3 MPC current market share [value EUR bn] 1% 0.1 0.1 0.1 0 0.1 0.3 Assume split of MPC phones (smartphone 35% 35% 35% 35% 35% Assumptions from candidate vs feature) in smartphones [mn phones] 0.05 0.06 0.05 0.03 0.05 0.23 Calculation required in feature phones [mn phones] 0.06 0.08 0.06 0.04 0.06 0.29 Calculation required MPC market share ambition [value EUR bn] 20% 1.1 1.5 1.2 0.7 1.1 5.7 Assume split of MPC phones (smartphone 35% 35% 35% 35% 35% Assumptions from candidate vs feature) in smartphones [mn phones] 0.92 1.23 1 0.61 0.92 4.67 Calculation required in feature phones [mn phones] 1.14 1.52 1.23 0.76 1.14 5.78 Calculation required

Step 3: Key challenges The candidate should be able to identify that MPC is not Apple or Samsung and be able to straight away determine that to reach its ambitions it will have to overcome significant challenges. The candidate should group these into some of the following areas: • Consumer trends • Product capabilities • Marketing spend vs. brand value • Competitor positioning • Relationships with key operators • Large and diversified markets • Global hardware solution for localised markets

Creative viewpoints – additional points for discussion • Candidate should discuss the time frame for such ambitions and conclude that such ambitions in the short to medium term could be too challenging • MPC should have more realistic goals in the short to medium term to ensure operationally it is focused in the right areas but can still keep a stretch target for the future • Keeping employees incentivised to realistic targets will help to maintain staff moral • In such a fast changing environment the right product with the right support and market execution will always do well • Quick assessment of what the candidate thinks have been Apple’s and Samsung’s recipe for their recent successes and what learning MPC could take away for themselves 108 London Business School Case Book

Roland Berger Strategy Consultants

Private Jet Co (PJC) – Fleet Renewal PROFIT

Case Background A private jet charter company, PJC, has 5 aircraft, Lear Jets which are used by businessmen, heads of state and high net worth individuals. The jets are now 8 years old and while recent performance has been very good, there are some individuals in the company who think it is time to replace the fleet as it is looking a little tired. In fact, customers are beginning to say that they prefer competitors’ planes because they are new, but this might be just because the cabins are more up to date. The market is growing and PJC remains the market’s leading prestige brand. If the aircraft fulfil the customers’ criteria, there is enough demand to go round.

Question Should Privet Jet Co replace its Information to be provided as a Suggested approach: fleet? response to candidate questions: 1 Establish that the options are: Aircraft Utilisation a do nothing, continue with the • Aircraft utilisation is measured existing fleet in Block Hours – 500 hours is b replace the fleet with new considered excellent aircraft • Older aircraft are less popular – in c refurbish the existing fleet another 5 years, utilisation will halve Start with asking the interviewer • Utilisation is driven more by questions about the business facilities (e.g. cabin, seats, in-flight model and various dynamics. movies) than aircraft age Identify the revenue and variable cost components of PJC’s Pricing business and demonstrate clear • The price to charter a Lear Jet is thinking about the dynamics USD 3,000 per BH that affect each.

Costs 2 Evaluate each option. A good • Assume all fixed costs will remain answer considers the revenue and the same; they can be ignored in cost implications of each option and this case looks to build a simple, top down • Old aircraft will get increasingly business case. Creative candidates expensive to operate (fuel will be able to identify more cost efficiency, maintenance) - assume and revenue dynamics but the USD 1,500 per BH for an 8-year- successful answer will be able to old plane, rising to USD 2,000 per keep one eye on the scope and time BH in another 5 years available in the case. • Cost of a new aircraft is USD 6m • Cost of refurbishing an aircraft is 3 Draw conclusions about the best USD 1m (inc. new cabin, in-flight investment case. This is about entertainment, GSM etc) more than the numbers; we want to • Engines require full overhaul after see candidates who can interpret 4,500 hours; cost of USD 0.5m (per the analysis into actionable engine) recommendations. • Cost of capital available to PJC can be assumed to be 10% London Business School Case Book 109

Roland Berger Strategy Consultants

Private Jet Co (PJC) – Fleet Renewal

StepThe Interview 1: Identify Process the evaluation structure A simple evaluation model can be used The key differentiator here is criteria including cost, safety, prestige, to generate three NPV cases. The key recognising that there is a third way – comfort and the latest facilities (e.g. point here is to first create a baseline refurbishment. This is hinted at in the being able to connect phones and case in which the cash flow of a do- question and will be made available laptops while in flight). nothing approach is calculated. Once in the information above should the this has been achieved, the same candidate ask the right questions. The calculations can be re-run for the other aircraft age is a key driver of costs but investment scenarios. the customer is driven by a range of

1 Baseline (Do-Nothing) 2 Re-New Fleet 3 Refurbish Fleet

Calculate revenue from declining Calculate revenue which will hold firm as Calculate revenue which will hold firm utilisation as customers choose customers continue to use PJC’s newer as customers continue to use PJC’s competitors’ planes’ over PJC planes newer planes (cabin not aircraft is important) Calculate variable costs driven by cost Calculate variable costs which will per Block Hour, which will increase over remain stable due to lower maintenance Calculate variable costs driven the time due to aircraft age and fuel costs on newer planes by cost per Block Hour, which will increase over time due to aircraft age Calculate cash flow which will be the Calculate cash flow driven by investment same as gross margin due to absence of in replacement fleets Calculate cash flow driven by capital investment investment in re-furbishing fleets

Step 2: Evaluate each investment option The second thing to get right is the structure of the calculation itself. The important thing here is to concentrate on answering the question and avoid getting trapped in the detail or going off on tangents. A tree structure will help and, indeed, shows the interviewer that you understand the big picture.

Price per BH > USD 3,000 per BH

> 3,000 hours pa., dropping to Revenue Utilisation (BH) 1,500 hours p.a. after 5 yrs for old a/c

Cash Flow > USD 1,500 per BH, rising to NPV calculation Variable Cost Cost per BH 2,000 hours per BH after 5 should assume yrs for old a/c 10% discount rate

CapEx A/C purchase > USD 6m per aircraft

> USD 1m per aircraft A/C refurbishment > USD 0.5 m per engine after 4,500 BH 110 London Business School Case Book

Roland Berger Strategy Consultants

Private Jet Co (PJC) – Fleet Renewal

Developing a top-down revenue and In addition, variable costs (fixed costs that the company is no longer cost model over 5 years will enable can be ignored in this comparison) are growing; a lack of investment leads to the candidate to build a cashflow rising as the aircraft spends more time stagnation and eventual decline. and NPV. For the baseline case, on the ground being fixed, fuel costs revenues will decline over time as the increase. By 2013, the engines will aircraft interiors look increasingly old have completed the maximum 4,500 The comparison only needs to be compared to newer aircraft owned by hours and will require an overhaul completed for a single aircraft but the competitors. In 5 years’ time, as costing USD 1 million for two engines. it is important that the candidate many as half of all bookings are going clearly states this assumption. to competitors. The resultant cash flow will be positive but the candidate should recognise

Baseline 2012 2013 2014 2015 2016 2017 Block Hours 500 450 400 350 300 250 Price per BH (USD) 3,000 3,000 3,000 3,000 3,000 3,000 Revenue 1,500,000 1,350,000 1,200,000 1,050,000 900,000 750,000 Var. cost per BH 1,500 1,600 1,700 1,800 1,900 2,000 Total OpEx 750,000 720,000 680,000 630,000 570,000 500,000 Gross Profit 750,000 630,000 520,000 420,000 330,000 250,000 CapEx 1,000,000 FCF 750,000 (370,000) 520,000 420,000 330,000 250,000 NPV 1,399,605 10% discount rate

For re-fleeting, PJC needs to spend USD 6 million on a new plane in 2012 but no longer needs to overhaul the engines. The new plane will enable full utilisation of 500 block hours per aircraft and will stop costs from rising so fast in the future (at least for the time being).

Re-New Fleet 2012 2013 2014 2015 2016 2017 Block Hours 500 500 500 500 500 500 Price per BH (USD) 3,000 3,000 3,000 3,000 3,000 3,000 Revenue 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 Var. cost per BH 1,500 1,500 1,500 1,500 1,500 1,500 Total OpEx 750,000 750,000 750,000 750,000 750,000 750,000 Gross Profit 750,000 750,000 750,000 750,000 750,000 750,000 CapEx 6,000,000 FCF (5,250,000) 750,000 750,000 750,000 750,000 750,000 NPV (2,188,100) 10% discount rate

For re-furbishing the planes, PJC incurs much lower capital expenses - USD 1 m per aircraft in 2012 and USD 1 m per aircraft in 2013 (remember the engines will still need overhauling!). The costs will continue to rise as the aircraft maintenance bills will still be higher – although fuel costs may be improved due to the overhaul. Most importantly, PJC will maintain full utilisation on the aircraft without needing to tie up USD 6 million in capital.

Refurbish Fleet 2012 2013 2014 2015 2016 2017 Block Hours 500 500 500 500 500 500 Price per BH (USD) 3,000 3,000 3,000 3,000 3,000 3,000 Revenue 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 Var. cost per BH 1,500 1,600 1,700 1,800 1,900 2,000 Total OpeEx 750,000 800,000 850,000 900,000 950,000 1,000,000 Gross Profit 750,000 700,000 650,000 600,000 550,000 500,000 CapEx 1,000,000 1,000,000 FCF (250,000) (300,000) 650,000 600,000 550,000 500,000 NPV 1,046,700 10% discount rate

Replacing a single aircraft will generate and negative NPV of over USD 2 million using the above assumptions. Simply re-furbishing the aircraft will generate a positive NPV of over USD 1 million if the numbers provided here are applied. London Business School Case Book 111

Roland Berger Strategy Consultants

Private Jet Co (PJC) – Fleet Renewal

Step 3: Make a recommendation The candidate needs to interpret the figures to make a clear recommendation. Comparing NPV over 5 years’ values would dictate that PJC is best placed if it does nothing but candidates are encouraged to demonstrate an understanding of the limitations of the NPV calculation.

A good answer would be: • Doing nothing gives the best NPV over 5 years but is likely to lead to stagnation or decline in the long term as PJC fails to generate top-line growth • Private Jet Co should invest for future growth • It seems too early to replace a fleet of only 8 years old. Learjets are designed to last far longer than that as along as their engines are maintained • Business jet charter customers are looking for prestige and this is often cosmetic; the experience needs to be luxury • PJC should refurbish what remains a relatively young fleet and should sweat their asset base

Creative viewpoints – additional points for discussion • A longer term view on NPV is important; 5 years is not enough for an asset with such a long lifetime • A further alternative would be to lease newer planes • Aircraft management services would give cheap access to newer planes • PJC should consider market signalling to show that year of manufacture is not important - it’s all about cabin luxury, safety records etc. distract from the competition • Rolling replacements would help to reduce NPV impacts 112 London Business School Case Book

Solon Management Consulting

Free to Air TV Network PROFIT

Case Question A free-to-air TV network is experiencing stagnating revenues. At the moment, a major shareholder is seeking to exit and is expecting management to create and deliver on a growth strategy for the group. You are supposed to support management in finding ways to grow revenues through diversification.

Intro Facts (tell the candidate if asked) Key Insights (do not share with the candidate) Q: What are the client’s current revenue streams? • The core business, TV advertising, is stagnating. A: More than 90% of revenues stem from TV advertising Additionally, winning market share from other free-to-air TV broadcasters is hard to achieve Q: How is the TV advertising market developing? A: In general, it follows the economy, but the share of TV in • Client’s main assets are promotional power, brand, and overall ad spending is stagnating / declining content

• These assets can be leveraged through platform variety, product variety, and innovative strength

Case at a glance (for the interviewer only)

Part A Part B Part C

Understanding the problem Structuring the solution Quantifying one of the ideas • The TV advertising market is • Ideas to leverage content • Structure depending on the idea stagnating • Ideas to leverage brand • Expectations: • Advertising budgets are being • Ideas to leverage promotional —— Structured approach, driven by shifted to online reach volumes and prices • Digitization has led to various new —— Business sense: What TV stations and increasing client’s assumptions are reasonable / share of the advertising market is achievable? very hard to achieve London Business School Case Book 113

Solon Management Consulting

Free to Air TV Network

Exhibit: Net advertising spending by media type

Media split of net advertising spending €bn

17.6 17.27 16.84 Other 15.55 15.74 0.8 0.8 Outdoor 14.84 15.16 0.8 0.7 0.8 1.5 2.1 2.2 Online 0.3 0.7 0.7 0.8 0.3 0.4 2.6 2.9 3.0 2.6 2.7 2.8 2.9 Other print 1.9 1.9 1.8 1.8 1.9 1.8 1.7 Magazines

5.3 4.9 4.8 4.8 4.8 4.9 4.7 Newspapers

4.0 3.8 3.9 3.9 4.1 4.2 4.1 TV

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Example for structuring the problem

Shift in advertising Shift in media budgets usage

Company Value = EBITDA X Multiple

Optimise core Exemplary business TV diversification (not part of case) Secure future growth through.... initiatives...

X 1 Platform variety • Online Video Exhaustive sourcing and exploitation • Play TV Leverage of video rights across all platforms • brand • Online • content 2 Product variety • Licensing / • promotional Systematic brand extension into Sports power growing B2B and B2C markets • Music

and 3 Innovative strength • Online Follow the target group through • Games strengthen investments into disruptive media independence from assets TV advertising 114 London Business School Case Book

Solon Management Consulting

Free to Air TV Network

Possible structure for calculating the monetization potential of online videos

New Users Key questions for successful ad monetisation (From own TV Repeat Users • TV reach and brand successful transformed into promotion, search + (mostly direct visits) engines) online reach? • Suitable content and service offerings available to generate loyalty, frequency and stickiness? • Optimised adjustment of amount and value of Unique User x Visits per UU advertising formats? • Optimised yield management established? • Right sales strategy? • Attractive environments and target groups for Total Visits x PI per Vist advertisers?

Video views x Ad Intensity

Available inventory x Sell-out Ratio Ø Discounts x Gross CPM

x Sold Inventory Net CPM

Net advertising Gross-Net Key figures for website performance measurement revenues Gap Reported / calculated data KPIs London Business School Case Book 115

SolonThe Management Interview Consulting Process

Rural Broadband Investment

North America

Case Question (for the interviewer) 1) Ask the candidate to read the attached article from the FT. Ask them what the story is about and whether the proposed business venture is a good one 2) Ask the candidate to size the market for satellite broadband 3) Ask the candidate how to structure the product to improve its appeal beyond the target segment

Intro Facts (tell the candidate if asked) Key Insights (do not tell the candidate) All of the required facts are in the article • The company invested $400m in launching a satellite

Further assumptions to be provided by the interviewer • Theoretically the best way to assess whether this is a good business is to perform an NPV analysis. But that is too complicated for mental maths

• Main driver of NPV other than WACC will be addressable market and market share

• Addressable market is rural broadband which doesn’t have access to DSL (as product is more expensive than DSL)

• May be possible to adapt product to compete with DSL by using direct marketing to adjust prices down in DSL capable areas

Case at a glance (for the interviewer only)

Is this a good business? Market sizing Product marketing

Identify the rural broadband market as Start with US population Product is aimed at very specific the target segment (ok to identify other segment, which is probably too small segments, eg. Air transport as upside) Convert to households to sustain it

Candidate should suggest calculating Make estimate about urban/rural split Ask candidate what could be changed an NPV and explain how this shows to widen appeal of product. Key insight that this is a good business Make further assumption about how here is that the company should look much of this is already served by DSL for ways to market the product more Candidate should notice that the widely without destroying the price product cannot compete against other Identify that some households will premium it enjoys in its target markets technologies because of price never be addressable

Remainder = addressable market 116 London Business School Case Book

Solon Management Consulting

Rural Broadband

ViaSat launch targets rural US web demand (FT.com) By David Gelles in New York

A newly launched $250m satellite will While most satellites are primarily used intensive services such as Netflix and soon start transmitting broadband for one-way broadcasting, ViaSat-1 Hulu has increased. “Wild Blue hasn’t internet to rural US consumers the will be able to handle the two-way changed its service for six years,” he latest effort by telecommunications transmission of data at 140 gigabytes said. “That isn’t considered a good groups to satisfy skyrocketing demand per second. That is more bandwidth value anymore.” ViaSat had revenues for high speed residential data than the combined capacity of Intelsat of $223m in the most recent quarter services. and SES, ViaSat’s two largest peers, with net income of just $8m. Mr Dankberg said. The new satellite from ViaSat will give Shares in the company are up 16 per the Nasdaq-listed company, based Intelsat, the worlds largest provider cent over the past month to about in California, the ability to effectively of fixed satellite services, recently $47, giving it a market capitalisation of compete with other non premium outlined plans to invest $1.3bn in four $2bn. Its Wild Blue service has about internet providers, which still are new satellite launches by the end of 400,000 customers in the US paying the only options for millions of US 2012. ViaSat, in October successfully about $50 per month for satellite consumers. launched its new ViaSat-1, one of the internet services. Mr Dankberg hopes highest capacity data satellites in the to treble the number of subscribers in Its bandwidth will also be used to world. Launched with a Proton rocket the coming year with capacity from the power the in-flight wireless internet in Kazakhstan, the satellite is now in new satellite. The company also makes service for JetBlue, the US carrier. geosynchronous orbit 22,500 miles money by supplying components to above the earth. It is powered by 100 other satellite makers, and selling The ViaSat launch is likely to meter wide solar panels. Including services to companies and the US be welcomed by the Federal launch costs and insurance, the government. Communications Commission, which satellite cost ViaSat $400m. is pushing for solutions to the digital One of ViaSat’s customers is Dish divide, especially in rural areas. “If Mr Dankberg conceded that his Networks, the satellite TV provider, we have a really good service at industry faces an uphill battle. which resells its service to US a reasonable price, we can keep “Satellite doesn’t have a good consumers. Earlier this year Dish’s expanding the market,” said Mark reputation for broadband service,” parent company, EchoStar, acquired he said. Moreover, WildBlue, the Hughes Communications, a ViaSat Dankberg, ViaSat’s chief executive. consumer facing service ViaSat rival, a move that could see Dish drop “Satellite will be better for a lot of acquired in 2009, has not upgraded ViaSat as a supplier. people than DSL, 3G or 4G.” its service, even as the use of data London Business School Case Book 117

Solon Management Consulting

Rural Broadband

Differentiation between poor, average and superior performance (for review after the case interview)

Poor Performance Average Performance Superior Performance Framing problem / Fails to identify the target Identifies rural market Correctly identifies rural prioritising issues market as being the rural as target but fails to see market. Understands market service from consumer nature of consumer point of view choice in this market and understands how central this is to proposition

Identifying relevant Does not correctly identify Identifies, amount invested Understands that information sum invested (which is and attempts to drill down consumer choice in rural written into the story). Fails into definition of rural, but markets very different to understand importance stops short of a convincing to other markets. Eg. No of rural target market for reason why rural market is 3G & unlikely to be cable the product an important definition internet. Only choice is DSL. Probes to find out about DSL distance limits

Running calculations / Does not size the market Is able to correctly size the Sizes the market and is drawing conclusions from correctly – ie. does not market using appropriate able to relate size of market facts use estimates to drill down assumptions/guided by the to likely market revenue from US population to rural interviewer using ARPU assumptions. population. Sizes market Candidate then attempts to on people not households compare EBITDA potential against investment cost

Identifying key implications Does not realize how Sizes the market correctly Sizes the market and and next steps; small the target market and is able to identify proposes creative ways demonstrates creativity is compared to the requirement for further to expand the appeal investment cost upside (non rural markets, of the product without airline market) to justify compromising the price investment cost premium the product can command in its main market

London Business School Case Book 119

Johnson and Johnson

EMEA Trocar Business Case Profit

Europe, Middle East and Africa DSL# 11-692

Case Background It was the end of the week; Paul Marcun was shutting down for the day, no closer to resolving his dilemma. As Vice President for Ethicon Endo Surgery (EES) in EMEA, he had been working on the business plan for the next financial year when his attention was drawn to the data on the trocar business. It was clear that something was going on in the market and that he needed to quickly get to the bottom of it.

EES is one of the Johnson & Johnson’s surgery globally through innovation in The EES product range for medical devices businesses, product design, high quality products, laparoscopic surgery includes access specialising in products used for open professional education and excellent devices (trocars), stapling devices, and minimal access surgery as well support teams across the world. This ligating devices, surgical instruments as advanced energy devices. The contributed to the increase in lap and advanced energy devices. business has grown from start-up in surgery adoption from inception in 1992 to a $4.7B1 global business. With 1990 to estimated 40% in 2010. headquarters in Cincinnati Ohio, its business extends across all regions.

EES led the adoption of laparoscopic A new way of performing surgery2 In 1988, Dr. J. Barry McKernan, after How Minimally Invasive Benefits of minimally invasive making only a 10mm incision, inserted Procedures work procedures a laparoscope (or miniature camera) Minimally Invasive Procedures (MIP), Not only do these procedures usually into a patient’s abdomen and removed which include laparoscopic surgery, provide equivalent outcomes to a gall bladder. The patient recovered use state-of-the-art technology traditional “open” surgery (which in days, rather than weeks or months. to reduce the trauma to human sometimes require a large incision), but This was the first laparoscopic tissue when performing surgery. minimally invasive procedures (using cholecystectomy performed in the U.S. For example, in most procedures, a small incisions) may offer significant and the beginning of the minimally surgeon makes several small ¾ inch benefits as well: invasive movement in surgery. incisions and inserts thin tubes called trocars. Carbon dioxide gas may be Quicker recovery – Since a minimally Since then, minimally invasive used to inflate the area, creating a invasive procedure requires smaller procedures have been changing space between the internal organs incisions than conventional surgery, the way people think about surgery. and the skin. Then a miniature camera the body may heal much faster. Patients who choose these innovative (usually a laparoscope or endoscope) procedures over conventional surgery is placed through one of the trocars Shorter hospital stays – Minimally usually have shorter hospital stays and so the surgical team can view the invasive procedures help get patients quicker recovery. This means getting procedure as a magnified image out of the hospital and back to life back sooner to the things that are on video monitors in the operating sooner than conventional surgery. important in life. room. Then, specialized instruments are placed through the other trocars Less pain – Because these procedures to perform the procedures. In some are less invasive than conventional cases, such as minimally invasive surgery, there is typically less pain colon surgery, a slightly larger incision involved. may be needed. Less scarring – Most incisions are so small that it’s hard to even notice them after the incisions have healed.

1 J&J 2010 Annual Report 2 Information about laparoscopic surgery - http://www.smarterpatient.com/patient/learnmore/minimallyinvasivesurgery 120 London Business School Case Book

Johnson and Johnson

EMEA Trocar Business Case

Two categories of laparoscopic Advanced laparoscopy – these surgical procedures comprise more advanced procedures Basic laparoscopy – these are broadly requiring advanced laparoscopic basic procedures that require basic to surgery skills. These include colorectal intermediate laparoscopic skill levels. (removal of large intestine segments), These include cholecystectomy (gall bariatrics (obesity surgery), thoracic bladder removal), appendectomy (removal of lung tissue) and advanced (appendix removal) and a number of gynaecology procedures. These basic gynaecological procedures. are often cancer related procedures These procedures are usually that require longer than one hour to completed in less than an hour with complete and involve relatively larger relatively few instrument exchanges numbers of instrument exchanges3. and often non-cancer cases.

The trocar market overview Trocars are placed through abdominal Reusable trocars – cost-conscious EES and the other leading players incisions to allow laparoscopes and hospitals continue to show a in the trocar market are primarily in other instruments to enter a patient’s preference for reusable trocars, which the disposable market. This market body. Because they are used in all offer a lower cost per procedure at $335 million in 2010 is growing at laparoscopic procedures, trocar unit despite a higher upfront price and can 3.65% compared to 0.9% growth in (or volume) sale growth will closely be used many times before damage. the reusable market. correlate to surgical procedure volume The preference for reusable trocars is growth. particularly strong in Germany, which There are however significant typically has a high reuse rate for variations in the market between the Trocars are available in EMEA in either many medical devices for developed developed and emerging markets as disposable or reusable versions: markets, and is also evident in the shown in table 1.1 & table 1.2. emerging markets. Manufacturers Disposable trocars – consisting of of disposable devices, however, bladeless, bladed, and blunt-tip are responding to this tendency by trocars, will continue to represent the aggressively marketing the advantages majority of the revenues earned in the of disposable products. On average, trocar market over the next several the basic laparoscopic procedures use years. These devices are generally 3 trocars per case whereas advanced seen as more convenient and safer laparoscopic procedures use 5 – 6 than reusable devices because they do trocars per procedure. not carry a risk of biological cross- contamination. Because these devices The EMEA trocar market, comprising can only be used once, they generate reusable and disposable devices higher revenues per procedure, which generated revenues of over $452 supports market revenues. million in 2010. The continued increase in laparoscopic procedures will lead to steady growth through 2018 (table 1). Furthermore, as a result of sterilization concerns, there is a strong preference for disposable trocars, which generate higher per-procedure revenues and contribute to greater market growth. By 2018, the EMEA trocar market will be valued at over $575 million, representing a CAGR of approximately 2.98%.

3 This means that the procedure requires more instances of passing instruments through the trocars and thus the quality of the trocar can have a direct impact on procedure duration. London Business School Case Book 121

Johnson and Johnson

EMEA Trocar Business Case

Competitive landscape4 In 2010, Ethicon Endo-Surgery led Applied Medical held the third-leading Hospitals in developed markets the European market for trocars position in the disposable trocar will typically sign an annual supply with the ENDOPATH XCEL trocar market in 2010, and has been rapidly contract with a trocar manufacturer range, followed closely by Covidien. gaining market share in Europe over so that switching between suppliers ENDOPATH XCEL is seen as the the last few years, particularly in the during a year is uncommon. However, premium top performing trocar in UK, Germany, and France. Applied emerging markets are often tender the market. Both of these firms were Medical competes in this market by driven for quarterly purchases. successful by holding strong positions offering its products at a much lower in the disposable segment, which price than Ethicon Endo-Surgery and In the much smaller reusable trocar generates about 3 times the revenue of Covidien, which allows it to secure segment, KARL STORZ is the market the reusable segment (about 5 times in contracts among cost-conscious leader, followed by Olympus. A few developed markets). Furthermore, both hospitals. Applied Medical is also other competitors were also active in of these companies are well-known expanding its reach into the emerging the European trocar market, including international firms with high-quality markets of EMEA with its low cost Richard Wolf, Aesculap (a B. Braun devices and wide product ranges. offering being very attractive to those company), and CONMED. See table 2 markets. for market share estimates. Also see Both of these companies are well table 3 for estimated relative pricing. positioned to remain leaders in the trocar market through 2015.

Significant trends Reports from the market have in some countries. In emerging Reuse of trocars – disposable trocars highlighted the following key trends in markets, the reverse has occurred are often re-sterilised and reused in the markets: where countries are posting good the emerging markets of the region. GDP growth and increasing healthcare Given infection risks, the trend is not Growing Minimal Invasive Procedure spend. observed in the developed markets but Adoption – countries all across the it is estimated that trocars are used EMEA region are increasingly adopting Increasing power of non-clinical approximately 1.8 times in the emerging laparoscopy with MIP penetration rate stakeholders – the role of the markets. The main identified motivation of 37% overall. For basic procedures physicians as the primary decision for reuse is cost reduction as the price in developed markets, the penetration maker in the selection of medical of a trocar is spread across multiple rates are over 70% while emerging consumables has been changing over uses. However improving patient countries are still below 50%. The several years to a point where hospital awareness and regulatory environment MIP penetration rates are expected administration staff now have equal in the emerging markets may reduce to increase into 2018, mostly in the or greater roles in product selection. level of reuse. advanced laparoscopy segment This has increased the role of price aided by improved physician skills in purchase decisions for hospitals Single port laparoscopy – In Europe, and acceptance by health technology across the region. there is considerable interest in assessment bodies of laparoscopy as the use of single-port laparoscopy recommended over open procedures5. Growth of low cost competitors – there devices, which are generally priced See table 4 for procedure volume are increasing numbers of low cost at a premium. Whereas adoption forecasts into 2018. manufacturers entering the trocar rates are still very low (less than 1% market, targeting customers in both of laparoscopic procedures), industry Global economic performance – the the developed and emerging markets. sources expect that the use of these recent recession and current sovereign Whereas the quality and performance devices will increase over the forecast debt crisis across much of Europe has of the low cost competitor products period, driven by improved physician led to cuts in government spending are usually 30% – 50% below the training, favourable results from clinical across the region. In developed levels for the premium products6, the studies, and patient demand for the markets, government healthcare quality is perceived to be improving single-port technique7. EES piloted a spending is declining by up to 10% especially for basic laparoscopic Single Site Laparoscopy (SSL) port in procedures. 2009 but has not executed a full launch.

4 Source – Millennium Research Group 5 See http://www.nice.org.uk/nicemedia/live/11840/53844/53844.pdf for a recent National Institute for Health and Clinical Excellence review of laparoscopic colorectal surgery 6 This is an internal estimate based on comparative performance in ease of entry, maintenance of gas pressure and trocar retention 7 http://en.wikipedia.org/wiki/Single_port_laparoscopy 122 London Business School Case Book

Johnson and Johnson

EMEA Trocar Business Case

Paul’s dilemma The data from the field was showing ENDOPATH XCEL trocar upgrade The BASX project increasing price pressure in the There has been very limited innovation EES has developed a new range of trocar business with more customers in the trocar product space. The trocars called BASX. These trocars considering the lower cost trocars product technology has largely are suitable for basic laparoscopic as a way to reduce procedure input remained the same over the last 20 procedures but not considered ideal costs. It increasingly looks like the years with only limited enhancements for advanced procedures8. There is ENDOPATH XCEL will struggle to made by the leading competitors. the possibility to launch this product. maintain its market share at the current However, EES has been working on The manufacturing and distribution price point. A number of marketing some significant enhancements to the costs of the BASX will be similar to teams from countries in the region are ENDOPATH XCEL range which would the ENDOPATH XCEL so that there considering price changes to respond significantly improve its performance will be gross margin variation with to the growing low cost competition. by addressing some of the key ENDOPATH XCEL based on the This will have significant implications concerns reported by physicians in relative price decided. on the business plan numbers for next performing laparoscopic surgery. year and into the strategic planning horizon. He also has two projects to consider in deciding a plan for the trocar business.

Your challenge Paul needs to make some decisions and has scheduled a meeting with EES President to discuss his plans and requires your advice.

Questions to answer:

1 As Paul, would you recommend 2 What change (if any) would you 4 What steps and/or other the launch of BASX and at what make to the positioning of the considerations would you segment / market should it be XCEL trocars range? What will be propose for implementing your positioned? If decided to launch, the revenue impact? recommendations? at what price relative to the ENDOPATH XCEL range? 3 What (if any) wider strategic recommendation would you make to the Company President regarding the trocar portfolio in EMEA?

Case Competition: Winning Presentations The Johnson & Johnson 2011 Business Case Competition was open to students from London Business School, ESADE and INSEAD and was won by London Business School. The links to the winning presentations are hosted on Career Services’ Portal. London Business School students and alumni can access them by scanning the mobile barcode below via their Smartphones.

8 The BASX performance is estimated at 30% - 40% below XCEL performance London Business School Case Book 123

Johnson and Johnson

EMEA Trocar Business Case

Exhibits

Table 1 – EMEA Trocar Market Estimates Value Market in MUSD 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAGR Total market (reusable & disposable) $ ‘ M $414.46 $434.72 $454.82 $467.16 $477.61 $491.40 $505.63 $520.78 $537.09 $555.71 $575.11 3.01% reusable market $ ‘ M $109.38 $114.61 $119.05 $119.56 $120.04 $120.83 $121.74 $122.70 $124.15 $126.06 $127.89 0.97% Disposable new market $ ‘ M $305.08 $320.11 $335.77 $347.60 $357.57 $370.56 $383.88 $398.08 $412.94 $429.66 $447.23 3.67% EES Sales $ ‘ M $176.12 $187.48 $202.54 $212.26 $220.05 $229.13 $238.86 $249.12 $260.03 $272.12 $284.80 4.29% Non-EES Sales $ ‘ M $128.96 $132.64 $133.22 $135.35 $137.53 $141.43 $145.03 $148.96 $152.90 $157.54 $162.43 2.64% Total market growth rate 4.89% 4.62% 2.71% 2.24% 2.89% 2.90% 3.00% 3.13% 3.47% 3.49% Source: Internal Estimates

Table 1.1 – Developed Market Trocar Market Estimates Value Market in MUSD 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAGR Total market (reusable & disposable) $ ‘ M $324.09 $334.59 $349.60 $358.01 $364.52 $373.51 $382.59 $391.85 $401.98 $412.80 $423.51 2.43% reusable market $ ‘ M $58.32 $60.13 $62.93 $63.53 $64.12 $64.84 $65.61 $66.30 $67.28 $68.21 $69.18 1.23% Disposable new market $ ‘ M $265.77 $274.46 $286.67 $294.49 $300.40 $308.66 $316.98 $325.55 $334.70 $344.58 $354.33 2.68% EES Sales $ ‘ M $158.16 $166.09 $178.95 $186.21 $191.42 $197.42 $203.77 $210.16 $217.08 $224.27 $231.49 3.16% Non-EES Sales $ ‘ M $107.61 $108.37 $107.72 $108.27 $108.98 $111.25 $113.21 $115.39 $117.63 $120.31 $122.84 1.82% Total market growth rate 3.24% 4.49% 2.41% 1.82% 2.47% 2.43% 2.42% 2.59% 2.69% 2.59% Source: Internal Estimates

Table 1.2 – Emerging Market Trocar Market Estimates Value Market in MUSD 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAGR Total market (reusable & disposable) $ ‘ M $90.37 $100.14 $105.21 $109.15 $113.09 $117.89 $123.04 $128.94 $135.11 $142.92 $151.61 4.81% reusable market $ ‘ M $51.06 $54.48 $56.12 $56.04 $55.92 $55.99 $56.13 $56.41 $56.87 $57.84 $58.71 0.67% Disposable new market $ ‘ M $39.32 $45.65 $49.10 $53.11 $57.18 $61.90 $66.91 $72.53 $78.23 $85.08 $92.90 8.31% EES Sales $ ‘ M $17.96 $21.39 $23.59 $26.04 $28.63 $31.72 $35.08 $38.96 $42.96 $47.85 $53.31 10.78% Non-EES Sales $ ‘ M $21.35 $24.27 $25.51 $27.07 $28.55 $30.18 $31.82 $33.57 $35.27 $37.23 $39.59 5.58% Total market growth rate 10.80% 5.07% 3.74% 3.61% 4.24% 4.37% 4.79% 4.78% 5.78% 6.08% Source: Internal Estimates

Table 2 – 2010 Trocar Market Share Estimates Disposable Reusable EES 43.4% Covidien 42.3% Applied Medical 13.2% KARL STORZ 40.6% Richard Wolf 20.1% Olyreusables/Gyrus/ACMI 19.8% Aesculap (a B. Braun company) 7.3% Other 1.1% 12.2% 100.0% 100.0% Source: Internal Estimates

Table 3 - 2010 Disposable Trocar Relative Prices EES 100 Covidien 70 Applied Medical 50 Source: Internal Estimates

Table 4 – EMEA Procedure Volume Estimates 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAGR Basic Procedures (Colecystectomy/ All 2,282,935 2,303,834 2,326,732 2,352,441 2,378,569 2,406,448 2,437,089 2,468,000 2,501,276 2,537,792 2,572,539 1.3% Appendectomy) Advanced (C/R, Upper GI Bariatrics, All 4,135,559 4,185,850 4,244,855 4,311,092 4,382,959 4,460,659 4,545,794 4,638,349 4,738,215 4,846,028 4,962,955 2.0% Thoracic, GYN) Total All 6,418,494 6,489,684 6,571,588 6,663,533 6,761,528 6,867,106 6,982,883 7,106,349 7,239,491 7,383,821 7,535,494 1.8% Basic Procedures (Colecystectomy/ MIP 1,246,869 1,280,670 1,316,508 1,350,742 1,384,296 1,421,170 1,458,320 1,498,339 1,538,319 1,580,051 1,619,553 2.6% Appendectomy) Advanced (C/R, Upper GI Bariatrics, MIP 1,007,550 1,055,464 1,112,072 1,170,441 1,230,685 1,296,067 1,368,130 1,446,420 1,533,931 1,631,512 1,730,457 5.7% Thoracic, GYN) Total MIP 2,254,419 2,336,134 2,428,580 2,521,183 2,614,981 2,717,237 2,826,450 2,944,759 3,072,250 3,211,563 3,350,010 4.1% Basic Procedures (Colecystectomy/ Open 1,036,066 1,023,164 1,010,225 1,001,698 994,273 985,278 978,769 969,661 962,957 957,742 952,986 -0.7% Appendectomy) Advanced (C/R, Upper GI Bariatrics, Open 3,128,009 3,130,387 3,132,783 3,140,652 3,152,274 3,164,592 3,177,665 3,191,929 3,204,284 3,214,516 3,232,499 0.4% Thoracic, GYN) Total Open 4,164,075 4,153,550 4,143,008 4,142,350 4,146,547 4,149,870 4,156,434 4,161,590 4,167,241 4,172,257 4,185,485 0.1% MIP adoption rate All 35.1% 36.0% 37.0% 37.8% 38.7% 39.6% 40.5% 41.4% 42.4% 43.5% 44.5% MIP adoption rate Basic 54.6% 55.6% 56.6% 57.4% 58.2% 59.1% 59.8% 60.7% 61.5% 62.3% 63.0% MIP adoption rate Advanced 24.4% 25.2% 26.2% 27.1% 28.1% 29.1% 30.1% 31.2% 32.4% 33.7% 34.9% Source: Internal Estimates 124 London Business School Case Book

Johnson and Johnson

EMEA Trocar Business Case

Table 4.1 – Developed Market Procedure Volume Estimates 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAGR Basic Procedures (Colecystectomy/ All 1,209,328 1,212,049 1,214,937 1,217,996 1,221,216 1,224,605 1,228,157 1,231,872 1,235,756 1,239,807 1,244,000 0.3% Appendectomy) Advanced (C/R, Upper GI Bariatrics, All 1,996,229 2,023,605 2,054,721 2,089,054 2,126,429 2,167,315 2,212,570 2,261,866 2,315,776 2,374,163 2,437,496 2.2% Thoracic, GYN) Total All 3,205,558 3,235,654 3,269,658 3,307,050 3,347,645 3,391,920 3,440,727 3,493,738 3,551,533 3,613,971 3,681,496 1.5% Basic Procedures (Colecystectomy/ MIP 828,433 847,506 865,529 880,659 895,404 910,254 925,320 940,611 956,129 969,854 982,406 1.6% Appendectomy) Advanced (C/R, Upper GI Bariatrics, MIP 661,447 698,497 740,114 783,019 825,315 871,344 921,507 974,670 1,033,657 1,096,465 1,158,590 5.8% Thoracic, GYN) Total MIP 1,489,880 1,546,003 1,605,643 1,663,678 1,720,719 1,781,598 1,846,827 1,915,282 1,989,786 2,066,318 2,140,997 3.7% Basic Procedures (Colecystectomy/ Open 380,895 364,543 349,407 337,337 325,812 314,351 302,838 291,260 279,628 269,954 261,593 -3.6% Appendectomy) Advanced (C/R, Upper GI Bariatrics, Open 1,334,783 1,325,108 1,314,608 1,306,034 1,301,114 1,295,970 1,291,063 1,287,196 1,282,119 1,277,698 1,278,906 -0.3% Thoracic, GYN) Total Open 1,715,678 1,689,651 1,664,015 1,643,372 1,626,926 1,610,321 1,593,900 1,578,456 1,561,747 1,547,652 1,540,499 -0.9% MIP adoption rate All 46.5% 47.8% 49.1% 50.3% 51.4% 52.5% 53.7% 54.8% 56.0% 57.2% 58.2% MIP adoption rate Basic 68.5% 69.9% 71.2% 72.3% 73.3% 74.3% 75.3% 76.4% 77.4% 78.2% 79.0% MIP adoption rate Advanced 33.1% 34.5% 36.0% 37.5% 38.8% 40.2% 41.6% 43.1% 44.6% 46.2% 47.5% Source: Internal Estimates

Table 4.2 – Emerging Market Procedure Volume Estimates 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAGR Basic Procedures (Colecystectomy/ All 1,073,606 1,091,785 1,111,796 1,134,445 1,157,353 1,181,842 1,208,932 1,236,128 1,265,520 1,297,985 1,328,539 2.3% Appendectomy) Advanced (C/R, Upper GI Bariatrics, All 2,139,330 2,162,245 2,190,134 2,222,039 2,256,530 2,293,344 2,333,225 2,376,483 2,422,439 2,471,865 2,525,459 1.8% Thoracic, GYN) Total All 3,212,936 3,254,030 3,301,930 3,356,484 3,413,883 3,475,186 3,542,156 3,612,611 3,687,958 3,769,850 3,853,999 2.0% Basic Procedures (Colecystectomy/ MIP 418,435 433,164 450,978 470,083 488,892 510,915 533,000 557,728 582,190 610,197 637,147 4.4% Appendectomy) Advanced (C/R, Upper GI Bariatrics, MIP 346,103 356,967 371,958 387,422 405,370 424,723 446,623 471,749 500,274 535,048 571,866 5.7% Thoracic, GYN) Total MIP 764,539 790,131 822,936 857,505 894,262 935,638 979,623 1,029,477 1,082,464 1,145,245 1,209,013 5.0% Basic Procedures (Colecystectomy/ Open 655,171 658,621 660,818 664,361 668,461 670,927 675,931 678,400 683,329 687,788 691,392 0.6% Appendectomy) Advanced (C/R, Upper GI Bariatrics, Open 1,793,226 1,805,279 1,818,176 1,834,617 1,851,160 1,868,621 1,886,602 1,904,733 1,922,165 1,936,817 1,953,593 0.9% Thoracic, GYN) Total Open 2,448,397 2,463,899 2,478,993 2,498,979 2,519,621 2,539,548 2,562,533 2,583,134 2,605,494 2,624,605 2,644,985 0.8% MIP adoption rate All 23.8% 24.3% 24.9% 25.5% 26.2% 26.9% 27.7% 28.5% 29.4% 30.4% 31.4% MIP adoption rate Basic 39.0% 39.7% 40.6% 41.4% 42.2% 43.2% 44.1% 45.1% 46.0% 47.0% 48.0% MIP adoption rate Advanced 16.2% 16.5% 17.0% 17.4% 18.0% 18.5% 19.1% 19.9% 20.7% 21.6% 22.6% Source: Internal Estimates